Adobe Earnings: Quietly Stacking Good Quarters as AI Momentum Builds

Key Morningstar Metrics for Adobe

• Fair Value Estimate: $590
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Adobe’s Earnings

We maintain our fair value estimate of $590 per share after wide-moat Adobe ADBE reported good first-quarter results, provided second-quarter guidance in line with our expectations, and reaffirmed its previously issued outlook for fiscal 2025. We left our model largely unchanged after this quarterly update.

We are encouraged by recent product introductions throughout the portfolio and think Firefly leaves Adobe well-positioned in artificial intelligence. We also see monetization in the early stages. Along those lines, Adobe disclosed that AI is generating $125 million in annual recurring revenue, which it expects to double by the end of the year. We still think recent price increases, product launches, and rapid generative AI adoption should help drive growth in 2025. We observe a growing disconnect between our fair value estimate and current trading levels that makes little sense, given the firm’s stable fundamentals and the bear case of AI obviating the need for Creative Cloud not materializing.

With three straight quarters of revenue upside, we see the demand environment as stable and see signs that the company’s AI strategy is working. Adobe’s strategy of creating a broad demand funnel at the top with Express and driving AI usage to convert users seems to resonate. The firm’s new products are gaining traction, notably with Acrobat AI Assistant, Firefly, and GenStudio, which make the $125 million AI book of business. First-quarter revenue grew 10% year over year as reported and 11% in constant currency to $5.71 billion, exceeding the top end of guidance at $5.68 billion.

Management’s ability to drive margins in the face of high investment levels surrounding generative AI remains impressive. We think margins can grind a little higher over time but will be limited by Adobe’s already stellar profitability. Non-GAAP operating margin was 47.5%, compared with 47.6% a year ago.