Adobe Results Seen as ‘Make-or-Break’ to Prove AI Credentials

(Bloomberg) -- Adobe Inc. is running out of time to show investors it can be a winner in the artificial intelligence era.

The shares are down 8.3% this year, underperforming an index that tracks the software sector, which is up more than 30%. And after last quarter’s guidance disappointed Wall Street, the pressure is on for results due after Wednesday’s market close. Adobe needs to demonstrate it can make money from its AI tools and stand up to rising competition from generative AI platforms that create images and videos from user prompts.

“This is a make-or-break quarter, because it remains to be seen if Adobe can monetize AI and ward off competition,” said Jamie Meyers, senior analyst at Laffer Tengler Investments. While the stock is one of the firm’s 12 best ideas, it is currently “on probation” given a lack of clarity on AI, he said.

Adobe has been adding its proprietary AI technology, Firefly, to products like Photoshop and Illustrator. But it’s rolling out its AI video product much more slowly than OpenAI’s rival Sora service. The company said last quarter that it has been focused on making sure customers use its AI features rather than seeking to directly make money from the tools — a strategy that is starting to test investors’ patience.

“It has invested a lot, but we’re getting tired of not seeing a bang for the buck, and if the tone is negative again, it will be a while before Adobe can shake the sense it is falling behind,” Meyers said.

The fourth-quarter results are expected to show net earnings growth above 13% and revenue growth of almost 10%. However, net new recurring revenue is seen falling 3.1%, which would represent the first decline for this key metric in a year. Analysts also expect to see weakness in Adobe’s creative cloud segment, which houses the AI tools.

Sentiment going into the report is mixed, according to analysts at Citigroup Inc. “The core business is facing continued revenue leakage exacerbated by macro/ competitive headwinds,” analyst Tyler Radke wrote in a note. Radke also trimmed his price target, saying shares are likely to remain range-bound given Adobe’s focus on getting more users for its AI tools over monetizing the technology.

Adobe discussed pricing for its AI video tool at its annual conference in October, but analysts aren’t factoring in much uplift yet. The consensus estimate for net 2025 earnings and revenue have both slipped over the past quarter.

Other software companies have also faced questions about how well they are navigating the transition to AI, and results have been mixed. Salesforce Inc. surged after its most recent results seemed to validate its AI strategy, while Oracle Corp. failed to live up to high expectations despite AI tailwinds.

“Salesforce could be a precursor to Adobe, since it delivered an AI product that has a lot of utility for its customers, and we certainly see utility from Adobe’s AI products,” said Alonso Munoz, chief investment officer at Hamilton Capital Partners. “If Adobe’s pricing translates to growth this quarter and investors like what they see, shares will be rewarded, and if it really delivers, I think it will catch up to other AI stocks.”

If Adobe is able to reassure investors about its long-term growth prospects, there is room for the stock to move higher, based on its valuation. The shares trade at less than 27 times estimated earnings, below their 10-year average of 32. The stock is also cheaper than the software index, which has a multiple of 38.

Still, investors need to see conclusive proof of a payoff from AI.

“Right now this lower valuation is justified by how the growth has slowed from years past,” said Laffer Tengler’s Meyers. “However, getting clarity and seeing tangible monetization from AI could really lead to a catch-up trade. We’re optimistic but cautious.”

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