Adobe Earnings: Strong Quarter Overshadowed by Light Revenue Guidance

Key Morningstar Metrics for Adobe

• Fair Value Estimate: $635.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Adobe’s Earnings

We are maintaining our fair estimate of $635 per share after Adobe ADBE reported good third-quarter results while providing guidance that was light on the top line. We think the 9% after-hours selloff is overdone, as we see solid trends from last quarter continuing this quarter. We see no glaring weak spots in its results. Management hinted that some deals may have been pulled forward, which would help explain the top-line strength this quarter combined with slight downward guidance for the fourth quarter.

We are encouraged by recent product introductions throughout the portfolio and think Firefly leaves Adobe well-positioned in artificial intelligence. We think recent price increases, important product launches, and rapid generative AI adoption should help drive growth at least through 2025. Changes to our model were short-term fine-tuning, while our longer-term estimates are unchanged and we continue to see shares as undervalued.

We view revenue performance in the quarter as strong, and we left our forecast largely intact. Adobe’s strategy of creating a broad demand funnel at the top with Express and driving AI usage to convert users is working. Management noted good performance in digital, large enterprise customers, small and midsize businesses, and international. Third-quarter revenue increased by 11% year over year in constant currency to $5.41 billion, exceeding the top end of guidance at $5.38 billion. Net new digital media ARR was $504 million, compared with guidance of $460 million, which was a stumbling block in the first quarter, but has been strong since.

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 levels. Our long-term margin forecast is largely unchanged. Non-GAAP operating margin was 46.5%, compared with 46.3% a year ago.