Adobe Earnings: Creative Cloud Drives Strength, While Firefly AI Begins To Produce Revenue

Key Morningstar Metrics for Adobe

• Fair Value Estimate: $510
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Adobe’s Earnings

Wide-moat Adobe ADBE reported good third-quarter results, including revenue and non-GAAP earnings per share that exceeded the top end of guidance and our expectations along with it. We characterize management’s fourth-quarter guidance as in line with investor expectations, which, given recent strength and Firefly AI now generating revenue, could be interpreted as a slight disappointment. We think this mentality misses the mark given such a short-term focus. Further, management will provide fiscal 2024 targets within its fourth-quarter results in December, so in-line guidance for one quarter matters less to us here. To begin to accommodate recently announced price increases in the area of 10% for various Creative Cloud and single-app instances, we are modestly raising our growth estimates over the next several years. We have increased our fair value estimate to $510 from $485, although after a strong run, we see shares as fairly valued.

Adobe is juggling many balls, with the recent general availability of Firefly along with several other solutions, price increases, the looming Figma acquisition, and other changes on the pricing and packaging front. We see these as uniformly positive for the company and expect Adobe to remain the clear leader in the creative market as a result. We will be looking for more details on innovation, bundling, and growth opportunities at Adobe MAX, Adobe Summit, and fourth-quarter results, which are all on the horizon. Net new creative ARR was $464 million in the quarter compared with guidance of $410 million.

Third quarter revenue grew 13% year-over-year in constant currency (10% as reported) to $4.89 billion, exceeding the top end of guidance at $4.87 billion. Digital media grew 11% year over year as reported and effectively drove all of the upside in the quarter relative to our model, while digital experience grew 10%. Within digital media, we see both Creative Cloud and Acrobat as having strong quarters.