Although Adobe (ADBE) executives have made it clear that they are all-in on artificial intelligence, Wall Street has been slow to warm up to its execution.
Adobe is delivering its vision through its AI-assisted Firefly platform, which lets users generate images, video, audio, and vectors.
But even as the company delivered better-than-expected Q2 earnings back in June, its shares dropped 5% as questions were raised about its AI positioning.
"The key investor question remains when (if) AI innovation can move the needle," Morgan Stanley analysts wrote in a client note at the time.
And then in August Melius Research analyst Ben Reitzes downgraded Adobe shares from Sell to Hold, while also cutting his price target to $310 from $400.
Reitzes was particularly bearish on Adobe and the rest of the software industry being able to fend off the threat from AI to their business models.
“The world is coming around to the reality that ‘AI is eating software,’” Reitzes wrote, referencing a quote that venture capitalist Marc Andreesen made back in 2011 about how software at the time was disrupting numerous industries.
But after its Q3 revenue beat last week – its second-consecutive quarter of better-than-expected earnings – Wall Street might finally be coming around to Adobe’s AI business.
Adobe reported revenue of $5.99 billion, compared to the consensus estimate of $5.91 billion, and adjusted earnings of $5.31 per share, versus the expected $5.18.
The company also said that 99% of Fortune 100 companies have used AI in an Adobe app, and over 40% of its top 50 enterprise accounts have doubled their annualized recurring revenue (ARR) spend since the start of FY 2023.
Investors remain bearish even as Wall Street gets bullish
Goldman Sachs analysts maintained a Buy rating on Adobe’s shares and reiterated a $570 price target, citing the company’s “AI momentum.”
Adobe raised its ARR projections for its digital media business, and Goldman analysts see AI as fueling further growth for the unit.
“While investors have questioned the durability of Adobe’s double-digit growth, we see an encouraging path forward: if AI can enable an inflection in DM ARR growth, the growth engine for the overall business should remain intact,” they wrote.
Goldman points to the company’s annual Adobe MAX conference in October as a catalyst to learning more about the company’s further plans for its AI strategy.
“All in, we believe AI is positioning Adobe to realize an inflection in the overall business and compounding growth longer-term,” the analysts wrote.
Bank of America Securities analysts maintained their Buy rating, while cutting their price target to $460 from $475.
Despite the price target cut, BofA is bullish on Adobe, writing that “gradual, continued traction with AI first products is likely to drive accelerating growth.”
The analysts noted that the Q3 beat is “a turning point for Adobe” and added that while “the results are unlikely to shift the tide on the AI winner/AI loser debate, it should help move the conversation closer to AI beneficiary.”
In the “AI winner/AI loser debate,” investors seem to have put Adobe in the loser category, as shown by how its stock continues to drop even after it delivers solid earnings reports.
Jefferies analyst Brent Thill said in a client note last week that investor sentiment around Adobe’s shares “is exceedingly low,” even though he is bullish on the stock.
And Deutsche Bank analyst Brad Zelnick, who is also bullish on the stock, noted in a client note last week that the “AI bear narrative” continues to drive Adobe’s share price down.
"While we continue to believe Adobe is a high quality company and recent innovations will ultimately prove Adobe a Gen AI winner [...] we do not expect results to meaningfully change the debate exiting the event," Zelnick wrote.
Your email address will not be published. Required fields are markedmarked