The Bear and Bull Case for Adobe Stock in 2024

Adobe (NASDAQ:) keeps following through with a consistent AI rollout. Will this be sufficient to fortify investor confidence?

On Thursday, March 14th, at 2 PM Pacific Time, Adobe (NASDAQ: ADBE) is scheduled to report Q1 2024 earnings. Following the announcement of the Sora text-to-video model from OpenAI, ADBE stock took an 11% dive in the last 30 days.

However, long-term ADBE holders have done well, as ADBE shares gained 72% of value over a one-year period. Based on a Zacks Investment Research forecast of 11 analysts, the consensus for Adobe’s earnings per share (EPS) is $3.57 vs. the reported $2.97 in the year-ago quarter.

In the last Q4 ‘23 quarter, Adobe beat the estimated EPS of $3.32 at $3.52. In terms of forecasted revenue growth, the company should track at least a 10.5% year-over-year increase to instill investor confidence, from last quarter’s $5.048 billion to forecasted $5.14 billion.

So far, Adobe has beaten EPS estimates for the last three consecutive quarters. But does the company have what it takes to compete with the next generation of generative AI?

Adobe’s Business Model Examined

Similar to OpenAI, Adobe generates revenue from recurrent subscription streams. With the launch of Adobe Creative Cloud in July 2013, the company transitioned from a licensing model to a software-as-a-service (SaaS) model. This left the company with two main divisions: Digital Media and Digital Experience.

By September 2020, Adobe phased out its advertising Cloud segment’s managed service ad network. At the time, Adobe CEO Shantanu Narayen called the process a necessary transition toward eliminating “all the inefficiencies” and moving to “profitable growth as we invest in the Digital Experience business.”

In the last Q4 2023 report, the company placed a $3.35 – $3.40 earnings per share target for Q1 2024. The target for the Digital Experience segment revenue was $1.27 – $1.29 billion, while the target for the Digital Media segment revenue was $3.77 – $3.80 billion. The target for Adobe’s total revenue in Q1 ‘24 was set within the forecasted $5.14 billion, at $5.10 – $5.15 billion.

Overall, Adobe’s transition to a subscription-based SaaS model was highly successful, having generated an operating cash flow of $7.30 billion in FY23. Although not as high as $7.84 billion in 2022, it points to Adobe’s strong core business model, leaving the company with plenty of financial flexibility to pursue research and development.

Adobe’s AI Rollout

Much like Nvidia (NASDAQ:) dominates the data center market share for generative AI, Adobe cornered the global graphics software with three main products: Adobe Photoshop (41.74%), Adobe InDesign (26.13%) and Adobe Illustrator (12.25%).

In September 2023, the company rolled out its Firefly suite of generative AI models, integrating across Adobe Creative Cloud. One of the groundbreaking features is Generative Fill and Generative Expand in Photoshop. By simply typing words and marking a certain area, users can seamlessly swap objects within an image, drastically increasing productivity and breaking down barriers to entry.

Likewise, Adobe AI-boosted Illustrator with Generative Recolor, cutting down repetitive and tedious tasks. In February 2024, Adobe announced another milestone, conversational AI Assistant for Reader and Acrobat. Still, in beta, users can access an add-on subscription plan to instantly generate document summaries, navigation, intelligent citations, and insights.

The AI Assistant generates questions and answers via the conversational interface based on the document’s content. This is a massive breakthrough for mainstreaming AI because PDF has become a document standard. Moreover, Adobe’s new internally integrated AI Assistant will also be able to digest Word and PowerPoint documents.

Does OpenAI’s Sora Threaten Adobe?

Adobe Premiere has been the company’s long-standing suite for professional video editing, including motion graphics with templates. Sora’s text-to-video generation represents another barrier to entry demolition, as users’ skills are contained to their imagination, depicted by words.

However, such generative services suffer inherently from a lack of control. Just as with generative AI images, users have to go through hundreds of iterations to find the match they had envisioned. More often than not, their vision is curtailed by the AI model’s training set and intentionally set limits for “AI safety,” as demonstrated by the Google (NASDAQ:) Gemini debacle.

Considering Adobe’s AI integration so far, it is safe to say that the company is likely to bring an AI video generative capability, one that will bridge the gap between content randomness and fine control.

What is the Adobe Stock Price Target?

Based on 33 analyst inputs pulled by Nasdaq, the average ADBE price target is $647.83 vs. the current $558, suggesting a 16% valuation rise twelve months ahead. The high estimate is $705, while the low forecast is $465 per share.

In 2023, Adobe repurchased 11.5 million shares, returning $1 billion in quarterly shareholder value. After terminating the $20 billion merger deal with competitor Figma in December, Adobe has been left with ~$6 billion in cash for AI expansion and stock buybacks into 2024.

In the long term, Figma’s competitive products could reduce Adobe’s market share, especially after the launch of FigJam AI in November. At the same time, users are typically reluctant to switch to new work environments, making Figma’s growth parallel to Adobe’s the most likely scenario.

Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

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