Adobe Inc.'s 6% Stock Drop Reflects Disappointment Over Lukewarm Generative AI Impact

Adobe Inc. provided a less-than-enthusiastic sales outlook for 2024. The firm disappointed investors anticipating a swift boost in the software company’s performance from new generative artificial intelligence tools.

In a statement on Wednesday, the company forecasted revenue to reach approximately $21.4 billion for the fiscal year ending in December 2024. The anticipated profit, excluding certain items, was $18 per share. 

Analysts, however, had a slightly more optimistic outlook, with average estimates predicting sales of $21.7 billion and adjusted profit of $18 per share.

Generative AI Technology

The anticipation surrounding Adobe’s potential as a frontrunner in benefiting from generative AI technology was initially high. In recent months, the company unveiled a new iteration of its AI model, Firefly, and implemented price increases. It also significantly focused on the technology during its October user conference.

Despite citing “significant upsell of our new Firefly” with major clients in post-results conference call remarks, this enthusiasm was deflated by the underwhelming annual outlook.

Adobe’s shares dipped approximately 6% in extended trading, settling at $583. Despite a remarkable 85% surge in stock value throughout the year, investors, who had been seemingly confident in Adobe’s ability to monetize generative AI, reacted with disappointment. Keith Weiss, an analyst at Morgan Stanley, noted this.

Annual recurring revenue for Adobe’s digital media unit, encompassing flagship creative software like Photoshop and Illustrator, is expected to be $1.9 billion. This falls short of the average analyst estimate of $2.02 billion. Analyst Kirk Materne from Evercore labelled the miss in the outlook for this metric, a key measure of annual subscription sales, as the primary cause for investor dissatisfaction.

Not All Dull For Adobe

During a conference call addressing questions from analysts about the guidance, CEO Shantanu Narayen expressed confidence in Adobe’s potential for another successful year. He cited no foreseeable obstacles on the economic or competitive horizon.

Acknowledging Adobe’s reputation for offering conservative annual outlooks, Chief Financial Officer Dan Durn emphasized the company’s prudent approach to setting expectations. He highlighted the opportunity for improvement during the call.

In the fiscal fourth quarter, Adobe reported a 12% increase in sales to $5.05 billion, with a profit of $4.27 per share, excluding certain items. The digital media unit saw a 13% increase in sales to $3.72 billion, while revenue from the unit housing marketing and analytics software rose by 10% to $1.27 billion.

Adobe’s acquisition plans faced regulatory hurdles, with the acquisition of design software startup Figma Inc. stalled by global reviews. Adobe worked on remedy proposals to satisfy European regulators, while the US Justice Department reportedly prepared to block the deal with a lawsuit.

Regarding regulatory matters, Adobe strongly disagreed with findings from the UK’s competition regulator and anticipated a decision from the US Justice Department soon. Additionally, the company disclosed a more than year-long investigation by the US Federal Trade Commission into its subscription cancellation practices. Adobe acknowledged potential significant monetary costs or penalties that could impact financial results and operations.