Adobe’s stock gains as its AI investments start bearing fruit

Adobe Inc.’s shares made gains in late trading today after the Photoshop maker delivered third-quarter financial results that surpassed Wall Street’s expectations and offered a strong outlook for the current quarter, indicating that its investments in artificial intelligence are paying off.

The company reported third-quarter earnings before certain costs such as stock compensation of $5.31 per share, easily beating the Street’s target of $5.18 per share, while revenue for the period rose 11%, to $5.99 billion, ahead of the $5.91 billion analyst target. Profitability grew too, with Adobe’s net income rising to $1.77 billion in the quarter, up from $1.68 billion in the year-ago period.

Looking to the fourth quarter, Adobe said it sees total sales in a range of between $6.08 billion and $6.13 billion. Wall Street analysts are looking for revenue of $6.09 billion. In terms of earnings, the company is targeting a profit of $5.35 to $5.40 per share, ahead of the analyst consensus estimate of $5.34 per share.

Founded back in 1982, Adobe is an iconic name in the technology industry, best known for its creative software products such as Photoshop, Acrobat and Premiere Pro, which are widely used by visual and video artists. The company has invested heavily into building AI tools, many based on its own generative AI model Firefly, which aims to help enhance the creativity of its users. For instance, Firefly powers the generative AI fill feature in Photoshop, which makes it easier to edit images.

Today’s results and the strong guidance suggest that the company’s investments in AI are helping to drive fresh growth. In a statement, Adobe Chief Executive Shantanu Narayen (pictured) said annual recurring revenue derived from AI products has grown to more than $5 billion, while “AI-first” ARR has surpassed the company’s target of $250 million by the end of the year.

“Adobe is the leader in the AI creative applications category,” Narayen insisted. “Given our customer strategy, AI product innovation and strong go-to-market execution, we’re pleased to once again raise our FY25 total revenue and EPS targets.”

Adobe’s AI focus starts paying off

Prior to today’s report, some analysts had expressed anxiety about Adobe’s AI investments. In a note to clients, Oppenheimer analyst Brian Schwartz said investors want to see greater monetization from its AI initiatives. This year, Wall Street has gone sour on application software makers such as Adobe and Salesforce Inc., as they face increased competition from AI-native startups. In the case of Adobe, its competitors include startups such as Canva Inc. and Figma Inc. – which it notably tried but failed to buy a couple of years earlier.

Still, the results show that Adobe is holding its own, at the very least. The company’s digital media segment, which encompasses both its creative tools and its document-processing software, delivered revenue of $4.46 billion in the quarter, up 12% from a year earlier, while ARR in that segment reached $18.6 billion.

Liz Miller of Constellation Research Inc. said Adobe’s growing AI success is no accident, as it has been very clear and deliberate about its AI vision in an effort to differentiate its offerings from those of its rivals.

“From the start of its AI journey, it has been laser-focused on responsible and ethical models that are ready to be put straight to work and inside creator’s workflows,” the analyst said. “It has put AI automation and agentic actions exactly where people work to enhance the quality of their working lives and their outputs, and the boost in revenue and AI-related annual recurring revenue is the payoff for those efforts.”

Adobe said it now expects digital media ARR to increase 11.3% in fiscal 2025, up from its earlier forecast of 11% growth. It’s forecasting revenue for the current quarter of between $4.53 billion and $4.56 billion, ahead of the Street’s $4.51 billion estimate.

The digital experience segment, which sells tools for marketing professionals, delivered $1.48 billion in sales, up 9% from the year-ago quarter. AI is also making its mark there, with Adobe launching its first set of AI agents earlier this week, aimed at automating customer journeys and audience segmentation. For the current quarter, Adobe expects digital experience revenue to land between $1.395 billion to $1.410 billion, which is also just ahead of the analyst target.

Miller said the new agentic offerings position Adobe ahead of the curve in ways that will be meaningful for marketers, content creators and consumers alike. She’s especially optimistic about its new LLM Optimizer tool, which launched along with its first agents, saying this is only one of a handful of tools focused on how content needs to evolve to ensure AI models are creating high quality and visible content that reflects the truth of the brands using them.

“As generative AI and large language models change the way people find answers to their questions, brands can no longer rely on SEO and search engine marketing to get themselves seen,” Miller explained. “They need something new, and Adobe is moving fast to deliver the tools that can help brands to stay ahead of this evolution. This is a new frontier for content and answer optimization, and Adobe is working hard to be a trailblazer.”

Miller wasn’t the only analyst to heap praise on Adobe. Angelo Zino of Craft & Capital said in a note to clients that Adobe’s AI monetization is progressing ahead of expectations. “We think it is supporting greater platform usage,” he said. “We view the results and guidance as highly encouraging, especially given the revenue acceleration and Adobe’s historically conservative approach to forward guidance.”

The momentum meant Adobe was also able to raise its full-year revenue forecast from a range of $23.5 billion to $23.6 billion to a new estimate of $23.65 billion to $23.7 billion. That’s a strong forecast, with analysts modeling just $20.58 billion in annual sales.

Adobe’s shares gained more than 3% in extended trading, but there is still a long way to go, as the stock has declined 21% in the year to date.

Photo: Adobe