Adobe Earnings to Highlight Impact of Competition From Generative AI

Adobe Faces Investor Concerns Amid Rising AI Competition

Investors in Adobe Inc. are increasingly anxious about the growing competition from generative AI technologies. The company's performance results will highlight how it is coping with this emerging threat. This week, Melius Research downgraded Adobe to hold from buy, citing risks posed by image and video generators from OpenAI and Google. Adobe shares have declined over 20% this year as Wall Street evaluates its future in a landscape increasingly dominated by AI-driven text and image creation tools.

“Companies will pay for software that provides a clear return on investment, but if AI platforms can offer similar functionalities as features, the value proposition becomes uncertain,” explained Sean Sun, portfolio manager at Thornburg Investment Management. “Although Adobe is integrating AI into its products, AI-generated images and videos are improving rapidly, which could lead to a decrease in demand for Adobe's offerings.” Shares remained relatively stable on Wednesday.

On the other hand, companies focused on AI have seen favorable performance this year, including Microsoft Corp., Palantir Technologies Inc., and C3.ai Inc. Nevertheless, firms such as Salesforce Inc., Workday Inc., MongoDB Inc., and UiPath Inc. have experienced selloffs due to concerns over weakened enterprise IT spending, a trend that could also affect Adobe. Adobe’s previous earnings report had shown a weak outlook, heightening worries about competitive pressure. Consensus estimates for Adobe’s net full-year earnings have dropped 13% over the past three months, despite steady revenue expectations.

Since its mid-March report, Adobe has been working to reassure investors. AI-related product announcements at its annual Summit conference and pricing for its Acrobat AI Assistant services were well-received. However, these efforts have not reversed the stock's decline. Analysts expect Thursday’s report to reveal 20% growth in net earnings and nearly 10% revenue growth. Full-year revenue is projected to grow at a double-digit rate over the next few fiscal years, with free cash flow anticipated to increase 13% this year and accelerate to nearly 25% next year. The stock currently trades at 24 times estimated earnings, a discount compared to its long-term average, suggesting a low performance threshold for upcoming results.

More than 75% of analysts tracked by Bloomberg recommend buying Adobe’s stock, with an average price target indicating a potential 31% upside. According to Brent Fredberg, a portfolio manager at Brandes Investment Partners, some software companies might struggle against AI, but others could begin to look attractive from a valuation standpoint. The focus is on firms with extensive customer data and the financial strength to invest in their own AI solutions.

The rapid evolution of AI means that the perceived leaders and laggards can change swiftly. Alphabet, once considered a laggard, is now seen as a leader. "We are still in the early stages of AI, so it’s uncertain what it will mean for software demand or efficiency," stated Michael Mullaney, director of global market research at Boston Partners. "Some companies will be very vulnerable, while others could significantly benefit. This feels like the calm before the storm."

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Other earnings reports due include Broadcom, providing further insight into the tech industry's health in the current economic climate.