After the closing bell Thursday, Adobe(NASDAQ: ADBE) reported results for its fiscal third quarter that topped analysts' expectations. Despite that, shares of business software company were trading more than 9% lower early Friday afternoon, and it appears that the company's disappointing guidance for the quarter currently underway was the key driver of the sell-off.
Unexpected headwinds blowing
In the period that ended Aug. 30, Adobe turned $5.41 billion worth of revenue into operating/non-GAAP earnings of $4.65 per share. Both numbers were well up from its year-earlier results of $4.89 billion and $4.09 per share, and topped analysts' consensus expectations for a top line of $5.37 billion and a profit of $4.53 per share.
The company's near-term outlook, however, left something to be desired. For its fiscal fourth quarter, which ends in November, Adobe expects to report sales of $5.5 billion to $5.55 billion, and non-GAAP earnings per share of $4.36 to $4.68. Analysts' consensus Q4 estimates were for $5.61 billion and $4.67, respectively.
Notably, Adobe's projection that its digital media arm's annual recurring revenue rate will only reach $550 million during the fourth quarter was measurably short of analysts' expectation of $561.1 million, suggesting the company isn't getting as much traction as initially hoped from some of its newer, AI-powered software.
Too much uncertainty to own Adobe stock
That it's not an unreasonable concern.
Adobe is practically royalty within the business software world. It invented the PDF (portable document format) back in 1991, and its Photoshop software has long been the workhorse of choice for most professionals in the worlds of digital design, layout, and photography. The 2017 introduction of its Experience Cloud platform was also revolutionary at the time, allowing users to create unique digital/web experiences for each and every consumer.
The software and cloud services business has continued to evolve in the meantime, however, particularly thanks to generative AI. Although it wouldn't be accurate to say Adobe hasn't evolved as well, the industry's recent evolution has given rise to rivals offering new tools that can do many of the things that Adobe's do.
That doesn't mean Adobe is no longer competitive. Indeed, it's still quite competitive, and the leading name in certain slices of the software arena. Even with its lackluster fourth-quarter guidance, its top line is still expected to grow by 20% this fiscal year, and another 11% next year. Its earnings are apt to grow about as much.
Still, Adobe's generative artificial intelligence offerings aren't convincingly dominating in their niches to the degree that investors seem to have expected. Until the company's competitiveness on this front can be accurately assessed, Adobe stock won't be easy to own.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe. The Motley Fool has a disclosure policy.
