Adobe (ADBE – Free Report) shares have declined 10.9% year to date (YTD), reflecting the negative impact of stiff competition in the AI and Generative AI (GenAI) space from the likes of Microsoft (MSFT – Free Report) -backed OpenAI, as well as a lack of monetization of its AI solutions. The company’s new AI book of business (more than $125 million exiting first-quarter fiscal 2025) was a roughly low single-digit percentage of total revenues ($4.23 billion in the fiscal first quarter). ADBE expects this AI book of business to double by the end of fiscal 2025.
However, Adobe’s AI business is minuscule compared with the likes of Microsoft, Alphabet (GOOGL – Free Report) and Synopsis (SNPS – Free Report) . Microsoft’s Intelligent Cloud revenues are benefiting from growth in Azure AI services and a rise in AI Copilot business. Alphabet’s Google Cloud is benefiting from accelerated growth across AI infrastructure, enterprise AI platform Vertex and strong adoption of Gen AI solutions. Synopsys’ penetration into new and growing AI chip companies is a major growth driver.
In terms of share price performance, Microsoft and Synopsis outperformed Adobe, while Alphabet lagged YTD. Shares of Microsoft and Synopsis have declined 7.3% and 8%, respectively, while Alphabet has dropped 14.3%. Over the trailing 12-month period, Alphabet has returned 7.5%, while Microsoft and Synopsis shares fell 7.1% and 21.9%, respectively. Adobe shares have fallen 21.5% over the same timeframe.
ADBE Stock’s Performance
Image Source: Zacks Investment Research
Adobe stock is not so cheap, as the Value Score of D suggests a stretched valuation at this moment.
In terms of the forward 12-month price/sales, ADBE is trading at 7.12X, higher than the sector’s 5.72X.
Price/Sales Ratio (F12M)
Image Source: Zacks Investment Research
So, what should investors do with Adobe stock? Let’s find out.
Can Adobe’s Strong Portfolio Help the Stock Recover?
Adobe has expanded its AI portfolio with Adobe GenStudio and Firefly Services, which helps brands and their agency partners collaborate on marketing campaigns. ADBE is set to launch the most comprehensive set of web, mobile and desktop applications, delivered through various subscription tiers for creative professionals and creators.
Adobe plans to monetize standalone subscriptions for Firefly through the introduction of multiple Creative Cloud offerings that include Firefly tiering. Adobe plans to invest in its sales capacity to deliver Adobe-wide offerings across business, education and government. The integration of AI Assistant in Acrobat, Reader and Express bodes well for Adobe’s prospects.
ADBE is infusing Generative AI innovations across its portfolio, including AI-first standalone and add-on products such as Acrobat AI Assistant, Firefly App and Services and GenStudio for Performance Marketing. These factors are expected to boost top-line growth.
Adobe Offers Positive Guidance for FY25
For fiscal 2025, Digital Media Annual Recurring Revenue is now expected to grow roughly 11%. Digital Media segment revenues are expected between $17.25 billion and $17.40 billion. Digital Experience segment revenues are expected between $5.8 billion and $5.9 billion, while Digital Experience subscription segment revenues are expected between $5.375 billion and $5.425 billion.
Adobe reaffirmed its total revenue guidance, which is expected between $23.30 billion and $23.55 billion ($21.51 billion in fiscal 2024). Fiscal 2025 non-GAAP earnings are still expected between $20.20 and $20.50 ($18.42 per share in fiscal 2024).
ADBE’s 2025 Estimate Revision Trends Higher
For fiscal 2025, the Zacks Consensus Estimate for earnings is pegged at $20.42 per share, up by three cents over the past 30 days. The figure indicates 10.86% growth from fiscal 2024.
The Zacks Consensus Estimate for second-quarter fiscal 2025 earnings is pegged at $4.97 per share, unchanged over the past 30 days, suggesting 10.94% growth from the year-ago quarter.
ADBE’s earnings beat the Zacks Consensus Estimate in all the trailing four quarters, the average surprise being 2.53%.
Adobe Inc. Price and Consensus
Adobe Inc. price-consensus-chart | Adobe Inc. Quote
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
ADBE Stock: Buy, Sell or Hold?
Adobe’s deepening GenAI focus and innovative GenAI-powered portfolio are key catalysts. Hence, investors who already own the stock may expect the company’s growth prospects to be rewarding over the long term.
However, stretched valuation makes the stock unattractive for value-oriented investors.
The stock is currently trading below the 50-day and 200-day moving averages, indicating a bearish trend.
ADBE Stock Trades Below the 50-Day & 200-Day SMAs
Image Source: Zacks Investment Research
ADBE currently has a Zacks Rank #3 (Hold), which implies that investors should wait for a more favorable time to accumulate the stock.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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