Analysts revisit Adobe stock price targets after Q4 earnings

12 Dec 2024, 12:32 by Martin Baccardax · The Fresno Bee

Adobe shares slumped in early Thursday trading following a host of price-target changes on Wall Street following the web-design and graphics software group's end-of-year earnings and fiscal 2025 outlook.

Adobe (ADBE) has been of the tech market's biggest underperformers this year, falling around 13.2% over the past 12 months as it struggled to monetize its ambitions to infuse AI technologies across its broad software suite.

That said, the group's backlog, including unbilled revenue — known by analysts and investors as remaining performance obligations — rose to just under $20 billion at the close of its 2024 fiscal year, which ended in September.

The tally suggests that while monetization has been elusive, its creative offerings have generated strong interest from clients in what is becoming and increasingly competitive marketplace.

Adobe's broad spate of new AI offerings is attracting client and customer interest but has yet to translate into the kind of monetization that investors are expecting. AdobeAdobe

"Twenty-twenty-four was also a transformative year of product innovation, where we delivered foundational technology platforms," CEO Shantanu Narayen told investors on a conference call late Wednesday.

Adobe: AI demand vs. AI monetization

"We introduced multiple generative AI models in the Adobe Firefly family, including Imaging, Vector, Design, and most recently, Video," he added.

"Adobe now has a comprehensive set of generative AI models designed to be commercially safe for creative content, offering unprecedented levels of output quality and user control in our applications."

The group's fiscal-fourth-quarter earnings were solid, rising 13% from a year earlier to $4.81 a share and topping Wall Street forecasts. Revenue rose 11% to a Wall-Street-beating $5.61 billion.

Digital media, a division focused on content creation and document management, saw revenue rise 12% to $4.15 billion. Digital experiences, which centers on digital marketing, generated revenue of $1.4 billion.

Looking into the coming fiscal year, however, Adobe sees overall sales in the region of $23.3 billion to $23.55 billion, a forecast that missed analysts' targets.

D.A. Davidson analyst Gil Luria lowered his price target on the group by $60 to $625 a share. He said Adobe's outlook for revenue growth was conservative, "given the various growth levers the company has to monetize the value provided to enterprises and proliferate freemium offerings.

"Management provided positive AI commentary but noted that AI monetization is still early and ongoing," Luria said. "We continue to believe Adobe is well positioned to monetize its growing portfolio of generative-AI-enabled offerings while maintaining best-in-class margins."

Adobe's cautious 2025 revenue outlook

KeyBanc Capital Markets analyst Jackson Adler was similarly underwhelmed by Adobe's outlook, particularly with respect to its Digital Media and Cloud Creative divisions.

"The company just isn't performing quite as well as we all would have hoped," said Adler, who carries an underweight rating and $450 price target on the stock.

"AI monetization continues to get kicked further and further down the road, its willingness and ability to drive pricing in the coming years appears to be lower than in the previous couple years, competition from the known unknowns is putting pressure on the top of funnel down market, and innovation from the unknown unknowns makes competing on the merits of the company's AI models extremely stiff," he said.

"Once upon a time these were future worries; now they are increasingly hardening into the new reality."

Bank of America Securities analyst Brad Sills, who lowered his price target by $35 to $605 per share, called the group's fiscal 2024 "a year of delayed gratification for AI." He noted Adobe is making some progress in "monetizing an impressive slate of generative offerings."

"The bearish view is that competitive pressure from large language models, Canva, and Figma is capping growth," he said.

"However, we do not believe replacement is occurring," he added. "Engagement metrics like 4 billion Firefly images in Q4 are promising and likely to lead to some reacceleration as we move through the year from better upsell and cross-sell."

AI competition intensifies

JMP Securities analyst Patrick Walravens was also upbeat, affirming his market perform (effectively neutral) rating despite what he said was a "generally weaker-than-expected" revenue guide for the coming year.

Still, he noted that "intense pressure from rapid innovation coming out of startups and AI labs, such as OpenAI" will challenge its business model over the near term.

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"While we believe Adobe is very well managed by Shantanu Narayen and [Chief Financial Officer] Daniel Durn ... the biggest issue for investors to monitor, in our opinion, is rising competition in the creative space, particularly from [privately held] Canva," he said.

Adobe shares were marked 11.5% lower in premarket trading to indicate an opening bell price of $486.43.

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This story was originally published December 12, 2024, 4:32 AM.