Analysts Bullish on Adobe Stock Despite Weaker Outlook

Key Takeaways

• Adobe shares tumbled Friday amid concerns about the software maker’s weaker-than-expected outlook.
• However, analysts were bullish on the stock, saying the company’s projection was likely conservative, expecting it could benefit from artificial intelligence.
• They suggested subscription upgrades to access Firefly, Adobe’s family of generative AI models, will be a key metric to watch.

Adobe (ADBE) shares plunged nearly 9% Friday amid concerns about its weaker-than-expected outlook, but analysts were bullish on the stock, suggesting the company’s projections were conservative and that it could get a boost from artificial intelligence (AI) demand.

Adobe’s Digital Media arm, which includes Creative Cloud subscriptions, brought in record net-new annualized recurring revenue (ARR) for the third quarter, but missed analysts’ estimates for fourth-quarter guidance. Jefferies analysts said they suspect Adobe’s outlook “could be very conservative,” citing strong tailwinds from pricing and AI monetization.

The analysts said fiscal 2025 “could be the year of AI monetization” for Adobe, noting that the company is “already seeing some monetization, though early, as new users buy higher-priced plans, existing users upgrade, enterprises buy Firefly Services, and new products such as Acrobat AI Assistant get adopted.”

Adobe’s ‘Firefly’ Takes Flight

Upgrades by Adobe Creative Cloud subscribers to access Firefly, the company’s family of generative AI models, will be a key performance indicator to watch, Bank of America analysts said.

“It is notable that Adobe is driving meaningful AI generation and running training and inferencing on large scale Firefly models, while delivering healthy margin expansion,” the analysts said, adding that it “also speaks to the advanced nature of Firefly models, relative to competing large language models.”

Nearly three-quarters or 11 of the 15 of the analysts covering Adobe tracked by Visible Alpha held a “buy” or equivalent rating for the stock as of Friday. Their average price target of $620.86 would imply over 15% upside from Friday’s closing price of $536.87.

Overall, despite the recent dip in Adobe’s stock, analysts remain optimistic about the company’s future prospects. They believe that the weaker outlook may be a result of conservative projections and that Adobe could benefit from the growing demand for artificial intelligence.

One area where Adobe is expected to see significant growth is through its Firefly AI models. These generative AI models have been well-received by users, and subscription upgrades to access Firefly will be a key metric to watch. Bank of America analysts have noted that Adobe’s ability to drive meaningful AI generation and deliver healthy margin expansion with Firefly models sets it apart from competitors.

Furthermore, analysts have highlighted the potential for AI monetization in the coming years. They believe that fiscal 2025 could be the year when Adobe fully capitalizes on AI, as new users purchase higher-priced plans, existing users upgrade, and enterprises invest in Firefly Services. The adoption of new AI-driven products, such as Acrobat AI Assistant, is also expected to contribute to Adobe’s AI monetization strategy.

Despite the recent stock dip, the majority of analysts covering Adobe maintain a positive outlook. Visible Alpha’s tracking shows that 11 out of 15 analysts hold a “buy” or equivalent rating for the stock. Their average price target of $620.86 suggests a potential upside of over 15% from the current stock price.

In conclusion, while Adobe’s weaker outlook may have caused some concern among investors, analysts remain bullish on the stock. They believe that the company’s projections are conservative and that Adobe has significant potential to benefit from the growing demand for artificial intelligence. The success of Adobe’s Firefly AI models and the potential for AI monetization in the coming years are key factors to watch. Investors may find this dip in Adobe’s stock to be an opportunity for long-term growth.

Read the original article on Investopedia.