Why Is Adobe Stock Dropping?

Why is Adobe stock dropping? A combination of underwhelming fiscal 2025 guidance and growing competition in the creative software market sent Adobe Inc. (NASDAQ:ADBE) shares sharply lower lately, with a decline eclipsing 12% in December.

Given Adobe’s conservative outlook and the widespread AI competition, worries have been raised about whether the company can effectively elbow out rivals in such a fiercely competitive space.

While the generative AI tools have been integrated into Adobe’s flagship products, including its own Firefly model, investments in these tools haven’t translated into meaningful revenues, at least not yet.

Fears that competitors’ tools could muscle their way into Adobe’s market have not been assuaged by management’s plans to offer higher-priced AI offerings and tiered subscription models.

So what does this all boil down to for Adobe shareholders?

Will OpenAI Disrupt Adobe?

On the plus side, Adobe reported solid results in the fiscal fourth quarter, with sales increasing in double digits and earnings beating analyst expectations. But, the positive impact of these results had been lost in a market focused on future growth.

OpenAI’s most recent radical development entails the creation of a new video-generating model, increasing competitive pressures and deepening investor unease because it seems like it’s on a collision course with Adobe’s offerings.

ADBE stock’s misfortunes didn’t end there because it also received downgrades and price targets were slashed by many analysts, further affecting market sentiments. It is currently trading at 22.78 times forward non-GAAP earnings, which is lower than the industry average.

What Is in Focus?

There were key developments around the integration of Adobe’s generative AI model in 2024, integrating Firefly into its flagship applications like Photoshop and Illustrator. It has been integrated so that users can make more complex and high-quality content faster and more easily.

One of the things Adobe has shown off at major events such as SIGGRAPH 2024 is its AI and 3D design innovations that include solutions for texture, material, and even 3D shape generation. The aim of these developments is to simplify workflows for professionals in games and film production.

The company is also exploring how to make tools powered by AI more accessible with tiered subscription offerings and has been looking to create targeted solutions for different creative industries.

Generative AI is playing a larger and larger role in improving productivity among traditional creative professionals who increasingly are in demand. Adobe’s AI-first platforms, including Adobe Express, were launched to make creative work easier and more accessible to people from across the creative scale (pros to beginners).

One key development is how it brings generative AI capabilities into its Creative Cloud and Experience Cloud platforms. For example, Adobe Firefly and GenStudio enables content creation and marketing via high-quality personalized content at scale.

That said, if a business is looking to harness marketing workflows in a systematic, streamlined, and brand-consistent way, these tools remain a good fit and are hard to emulate, a fact that will appease ADBE shareholders. Working with such large partners as Google, Meta, Microsoft, and even TikTok gives Adobe the capacity to provide data-driven insights and fine-tune campaign performance.

Adobe has continued to fight through stiff headwinds and competition, but its long-term success is rooted in a sticky subscription-based business model, as well as a broad product portfolio mix, and new AI initiatives. While short-term issues are likely to linger for a while, Adobe’s long-term outlook is likely to be bright as digital creativity and data-driven marketing continue to climb higher.

11% Growth Wasn’t Enough To Satisfy The Market

The company recently posted its fourth quarter (ended November 29, 2024) report that showed revenue was at $5.61 billion, an increase of 11% year-over-year, which also surpassed analysts’ expectations by 1.2%.

Digital Media segment revenues grew by 12% year-over-year while Document Cloud revenues rose 17% year-over-year, and the Creative top line rose by 10%. Its remaining performance obligations (“RPO”) exited the quarter at $19.96 billion, which is 16% year-over-year growth.

Adobe also saw net income increase to $1.68 billion, from $1.48 billion in the year-ago quarter, while non-GAAP EPS came in at $4.81 ($3.79 on a GAAP basis) compared to $4.27 ($3.23 on a GAAP basis) and surpassing the consensus estimate by 3%.

The company’s revenue for the full year came in at $21.51 billion in the fiscal year 2024, which was an 11% increase year over year, while non-GAAP net income per share rose to $18.42 from $16.07 in the prior-year quarter.

It now expects total revenue in the range of $23.30 billion to $23.55 billion, while EPS on a non-GAAP basis is expected to come in between $20.20 to $20.50. This guidance fell shy of expectations among both investors and analysts, causing the share price plunge while raising speculations of slower growth in the monetization of AI-driven technologies.

Is Adobe a Buy Today?

While short-term headwinds and conservative forecasts affected sentiment, Adobe’s strong leadership in creative software, integration with AI, and subscription growth means Adobe can by no means be counted out for the long-term.

For long-term investors looking to buy tech stocks, there are good reasons to buy Adobe shares. Even with some downgrades from analysts, most remain a confident ‘Buy’ with double-digit potential (more than 25%) in the year ahead.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.