Adobe Stock: A Conservative Outlook and AI Potential
Adobe shares dropped nearly 9% last Friday due to a weaker-than-expected financial outlook. Analysts remain optimistic about the stock, attributing this to the belief that Adobe's projections are conservative and seeing potential benefits from artificial intelligence (AI) developments. Notably, the subscription upgrades to access Firefly, Adobe’s suite of generative AI models, are seen as a critical factor for future performance.
Digital Media Performance and AI Monetization
Adobe's Digital Media division, which includes Creative Cloud subscriptions, achieved record net-new annualized recurring revenue (ARR) for the third quarter. However, it fell short of analysts' expectations for the fourth-quarter guidance. According to Jefferies analysts, Adobe's forecast might be "very conservative," with strong growth drivers anticipated from pricing and AI monetization.
Analysts predict that fiscal year 2025 could mark significant AI monetization for Adobe. The company is already benefiting as new users opt for higher-priced plans, existing users upgrade, enterprises purchase Firefly Services, and adoption of new products like the Acrobat AI Assistant increases.
Firefly's Role in Adobe's Future
The success of Adobe’s Firefly models is seen as a pivotal performance indicator. Bank of America analysts highlight that upgrades by Adobe Creative Cloud subscribers to access Firefly are essential to monitor.
They note that Adobe is successfully generating and running training and inferences on large-scale Firefly models while achieving healthy margin expansion. This development underscores the advanced capabilities of Firefly models compared to competing large language models.
Market Sentiment and Price Targets
Despite recent stock performance concerns, nearly three-quarters of analysts covering Adobe maintain a "buy" or equivalent rating, as per data from Visible Alpha. Their average price target of $620.86 suggests more than 15% potential upside from the recent closing price of $536.87.
