Adobe results are considered make-or-break to prove AI proficiency

(Bloomberg) — Adobe Inc. is running out of time to show investors it can be a winner in the age of artificial intelligence.

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Shares have fallen 7.7% this year, underperforming an index tracking the software sector, which has risen more than 30%. And after last quarter forecasts disappointed Wall Street, pressure is on to report results after the market closes on Wednesday. Adobe needs to prove that it can make money from its AI tools and withstand increasing competition from generative AI platforms that create images and videos based on user input.

“This is a crucial quarter because it remains to be seen whether Adobe can monetize AI and fend off competition,” said Jamie Meyers, senior analyst at Laffer Tengler Investments. Although the stock is among the company’s 12 best ideas, it is currently “on probation” due to a lack of clarity around AI, he said.

Adobe rose 0.6% on Wednesday.

Adobe has added its proprietary AI technology Firefly to products like Photoshop and Illustrator. However, the company is rolling out its AI video product much more slowly than OpenAI’s competing service Sora. The company said last quarter that it was focused on ensuring customers use its AI capabilities rather than making money directly from the tools – a strategy that is starting to test investors’ patience.

“There has been a lot of investment but we are tired of not seeing good value for money and if sentiment turns negative again it will be a while before Adobe can shake off the feeling that it has fallen behind.” said Meyers.

Fourth-quarter results are expected to show net income growth of over 13% and revenue growth of nearly 10%. However, net recurring revenue is expected to decline 3.1%, which would mark the first decline in this key metric in a year. Analysts also expect weakness in Adobe’s creative cloud segment, where its AI tools are located.

According to analysts at Citigroup Inc., sentiment on the report is mixed. “The core business is facing continued revenue declines, exacerbated by macroeconomic and competitive headwinds,” analyst Tyler Radke wrote in a note. Radke also lowered his price target and said shares will likely remain range-bound as Adobe focuses on attracting more users to its AI tools rather than monetizing the technology.

Adobe discussed pricing for its AI video tool at its annual conference in October, but analysts aren’t expecting a big increase just yet. The consensus estimate for net earnings and revenue in 2025 declined last quarter.

Other software companies have also faced questions about how well they are managing the transition to AI, and the results have been mixed. Salesforce Inc. rose after recent results appeared to validate its AI strategy, while Oracle Corp. despite the tailwind of AI, could not meet the high expectations.

“Salesforce could be a precursor to Adobe in that it has delivered an AI product that offers great value to its customers, and we certainly see value in Adobe’s AI products,” said Alonso Munoz, chief investment officer at Hamilton Capital Partners. “If Adobe’s pricing translates into growth this quarter and investors like what they see, the stock will be rewarded, and if it really succeeds, I think it will catch up with other AI stocks.”

If Adobe manages to convince investors of its long-term growth prospects, there is room for the stock to rise based on its valuation. Shares trade at less than 27 times estimated earnings, below their 10-year average of 32. The stock is also cheaper than the software index, which trades at a multiple of 38.

Still, investors must provide conclusive evidence that AI will pay off.

“Right now, this lower valuation is justified by the fact that growth has slowed compared to previous years,” said Meyers of Laffer Tengler. “However, clarity and noticeable monetization through AI could actually lead to a catch-up process.” We are optimistic, but cautious.”

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While AI has been a key focus for technology investors this year, quantum computing stocks have seen some massive gains of their own recently. IonQ Inc. is up about 400% from its September low, while D-Wave Quantum Inc. is up nearly 500% and Rigetti Computing Inc. is up more than 840%. The issue came into the spotlight on Tuesday after analysts at Alphabet Inc. welcomed Google parent company’s announcement of a major development in quantum computing through the use of its Willow chip.

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Adobe results are considered make-or-break to prove AI proficiency

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