Adobe results to reveal scale of threat from AI competition

Consensus estimates for the company’s net full-year earnings are down 13% over the past three months, though the view for revenue has held steady. — Bloomberg

CHICAGO: Investors in Adobe Inc are increasingly on edge about competition from generative artificial intelligence (AI).

The Photoshop maker’s results will illustrate how it’s coping with the threat.

Earlier this week, Melius Research downgraded Adobe to “hold” from “buy”, citing risks from image and video generators from OpenAI and Alphabet Inc’s Google.

Adobe shares are down more than 20% this year as Wall Street considers its prospects in a world where AI products create text and images out of user prompts.

“Companies will pay for software that offers a clear return on investment, but it’s become less clear which services do if AI platforms can just offer a version of the product as a feature,” said Sean Sun, portfolio manager at Thornburg Investment Management.

“Adobe is integrating AI into its own products, but AI images and video are becoming really good, really fast – and it could become a loser to the extent people stop spending on it and use AI instead.”

On one hand, software companies focused on AI have performed well this year, including Microsoft Corp, Palantir Technologies Inc, and Inc.

However, there have also been sell-offs from the likes of Salesforce Inc, Workday Inc, MongoDB Inc and UiPath Inc, which warned about weaker enterprise IT spending, a headwind that could also impact Adobe, according to Bloomberg Intelligence.

Adobe’s last report featured a weak outlook, underlining concerns about competition.

Consensus estimates for the company’s net full-year earnings are down 13% over the past three months, though the view for revenue has held steady.

Since its mid-March report, the firm has worked to reassure investors. AI-related product announcements at its annual Summit conference were viewed positively, as was pricing information for its Acrobat AI Assistant services.

While that has failed to reverse the stock’s drop, bulls have other positives they can point to.

Yesterday’s report is expected to show 20% growth in net earnings, along with nearly 10% revenue growth, according to data compiled by Bloomberg.

Full-year revenue is seen growing at a double-digit pace for the next few fiscal years, while free cash flow is expected to grow 13% this year before accelerating to nearly 25% next year.

The stock trades at 24 times estimated earnings, a discount to its long-term average, and its recent weakness could mean a low bar to clear in the results.

More than 75% of the analysts tracked by Bloomberg recommend buying the stock, while the average price target points to upside of 31%. — Bloomberg

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