Adobe falls after ‘strong’ Q3 as guidance leaves many ‘questions’

Adobe’s (NASDAQ:ADBE) stock fell about 9% premarket on Friday after the company’s guidance saw some concerns from investors and analysts.

Jefferies kept its Buy rating and $700 price target on the stock, noting that there were no questions on the strong print, but many on the guidance.

Analysts led by Brent Thill said that the fiscal third net new annual recurring revenue, or ARR, beat guidance by $44M, but the fiscal fourth quarter outlook was $21M below consensus, which disappointed investor expectations that were buoyed by positive checks.

While timing of large deals and Cyber Monday [a marketing term for e-commerce deals on the Monday after Thanksgiving] is a factor, the analysts also see extra conservatism versus seasonality and given accelerating AI usage.

Thill and his team expect fiscal 2025 could be the year of AI monetization. Fiscal 2024 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.

The analysts added that generative AI usage limits have not been enforced so far, but they believe this could change in early fiscal 2025, especially for higher-value gen AI processes for video, audio, 3D, and animation. Their checks suggest fiscal fourth quarter enterprise renewals will include a harder push to monetize AI usage.

Morgan Stanley maintained its Overweight rating and $660 price target on the stock.

The “results presented a tale of two quarters,” said a team led by Analyst Keith Weiss. They said it was a strong fiscal third quarter highlighted by a 10% net new Digital Media ARR beat and solid margin upside compared to a well below seasonal guide for fiscal fourth quarter net new Digital Media ARR.

However, the analysts said that with the building momentum behind a broadening portfolio of gen AI enabled solutions, they see this as conservatism and remain buyers.

Key points were — fiscal third quarter results beat consensus across revenues, ARR and margins, with the magnitude of the Digital Media net new ARR beat sustaining at about 10% versus the 11% second quarter beat; the initial guidance for fiscal fourth quarter Digital Media net new ARR at $550M was disappointing, coming below the $570M implied in the third quarter guidance, according to the analysts.

In addition, Weiss and his team noted that the usage of Generative Credits ramped in the quarter, with direct monetization avenues like Firefly Services and Acrobat AI Assistant contributing well in the fiscal third quarter. They added that the enterprise and federal contracts in the Document Cloud pulling into the third quarter impacted the shape of the second half of the fiscal year, but the fiscal 2024 target still moves about $23M higher.

Mizuho too said that Adobe’s had a good fiscal third quarter net new ARR upside, but the guidance disappointed.

Analysts said the company reported a very good quarter above Mizuho’s expectations, as third quarter net new Digital Media ARR of $504M beat management’s nearly $460M guidance by more than it expected. Consistent with Mizuho’s above-Street estimates, this includes a return to year-over-year net new Creative Cloud ARR growth for the first time in four quarters.

However, as Mizuho also expected, fourth quarter net new Digital Media ARR guidance was below its/consensus estimates.

Meanwhile, JMP said Adobe posted strong fiscal third quarter results but the guidance raises questions.

Adobe (ADBE) has a Hold rating at Seeking Alpha’s Quant Rating system, which consistently beats the market. Meanwhile, the Seeking Alpha authors’ average rating is more positive with a Buy and so is the average Wall Street analysts’ rating, Buy.