On Sept. 13, Adobe(NASDAQ: ADBE) stock tumbled 8.5% in response to its third-quarter fiscal 2024 results and weak guidance.
Here's why Adobe is a top growth stock to buy now and what to look for from the enterprise software company.
Image source: Getty Images.
Unimpressive growth
Adobe reported record third-quarter revenue but guided for just $5.5 billion to $5.55 billion in fourth-quarter fiscal 2024 revenue and non-GAAP (adjusted) earnings per share (EPS) of $4.63 to $4.68. In its June report, Adobe guided for full-year revenue of $21.4 billion to $21.5 billion and non-GAAP EPS of $18 to $18.20. Through the end of its third quarter, Adobe generated $15.9 billion in revenue and $13.61 in non-GAAP EPS.
Factoring in its updated Q4 guidance, the midpoint of Adobe's full-year projections calls for $21.43 billion in revenue and $18.27 billion in non-GAAP EPS -- which is in line or even a little bit better than its prior forecast. Investors may have been expecting accelerating growth from Adobe given that the stock was up nearly 28% between June 13 and Sept. 12 -- which was the period before the second-quarter print and its recent report.
Expectations aside, the bigger issue is that Adobe's growth is slowing. The company is on track for the second consecutive year of 10% or so year-over-year revenue growth.
Metric | Fiscal 2020 | Fiscal 2021 | Fiscal 2022 | Fiscal 2023 | Fiscal 2024 (Projections) |
|---|---|---|---|---|---|
Revenue | $12.87 billion | $15.79 billion | $17.61 billion | $19.41 billion | $21.43 billion |
Non-GAAP EPS | $10.10 | $12.48 | $13.71 | $16.07 | $18.27 |
Data source: Adobe.
Although Adobe is growing earnings faster than revenue, the pace of top- and bottom-line growth just isn't good enough to justify Adobe's premium valuation. But there's reason to believe that the growth rate could pick up and make Adobe look like a better value.
Adobe's AI opportunity
Adobe was a pioneer in the software-as-a-service business model, releasing its bundled offering called Creative Cloud in 2012. The strategy catapulted Adobe to the software giant it is today. Although Adobe has released new products and improved existing tools, it has largely been coasting for several years thanks to its wide moat and entrenched position.
Artificial intelligence (AI) has opened the door to arguably the most significant product upgrades since the company launched Creative Cloud. Adobe has integrated AI functionality across its flagship products, offers subscription add-ons for AI assistants, and has released entirely new products like Adobe Firefly -- a generative AI tool for images, vectors, designs, and videos.
Adobe deserves credit for innovating rapidly. But these improvements have come at a cost, as Adobe's operating expenses outpaced its revenue growth over the last three years. Short-term-focused investors may look at Adobe's cost profile, lackluster growth, and valuation and choose to pass on the stock. However, patient investors could benefit by thinking about what will drive long-term returns for the company.
At its core, Adobe wins when its customers produce higher-quality and higher-quantity work. If AI can help creative teams accomplish complex tasks and handle basic tasks faster, then it stands to reason that Adobe could justify price increases. In other words, Adobe needs to deliver value to its customers, especially given that alternative solutions are often cheaper than Adobe's offering.
Creative Cloud costs $59.99 per month for individual users. Adobe heavily steers buyers toward the bundled option with relatively high pricing on individual apps, such as $22.99 each for Photoshop, Premier Pro, Illustrator, After Effects, InDesign, and others. Adobe has been developing new tools to strengthen the Creative Cloud bundle and help justify price increases.
For example, AI Assistant for Acrobat costs $4.99 per month and uses AI to answer questions and provide summaries. This can be an invaluable tool when tasked with a long and complex document.
Adobe Express is $9.99 per month and is built for mobile, allowing users to design flyers, resumes, TikToks, and Instagram Reels.
By developing new tools that enhance its core offering, Adobe can grow its recurring revenue and reduce its dependence on legacy apps.
Be patient with Adobe
Instead of focusing on Adobe's near-term results, investors should turn their attention to Adobe's innovation and AI monetization.
Adobe is making improvements to help marketing and creative teams save time and enhance the quality of their work. The benefits of this approach may not be seen in the near-term results. However, over the long term, this is the exact kind of strategy that can unlock sustainable growth and position Adobe to handle its own against the competition.
Add it all up, and investors are getting an excellent opportunity to buy Adobe while it is still in the early stages of its AI-driven evolution.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe and Meta Platforms. The Motley Fool has a disclosure policy.
