Adobe Earnings: Strong Results, Uptick in Guidance, and Clearer AI Roadmap Drive Estimates Higher

Adobe Stock at a Glance

• Fair Value Estimate: $485
• Morningstar Rating: 3 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Wide

Adobe Earnings Update

Wide-moat Adobe ADBE reported an excellent second quarter, including revenue and non-GAAP earnings per share that exceeded our expectations and the top end of guidance. The firm also raised its full-year outlook for total revenue and non-GAAP EPS, as management anticipates an uptick from previous estimates in both revenue and annual recurring revenue for both Creative Cloud and Document Cloud. The impressive results, coupled with our belief that management is reinforcing its leadership position with Firefly AI, lead to slight increases in our assumption for both margins and revenue over the intermediate term, resulting in our fair value estimate increasing to $485 per share from $425. Despite this increase, we view the shares as fairly valued.

Second-quarter revenue grew 13% year over year in constant currency (10% as reported) to $4.82 billion, exceeding the top end of guidance at $4.78 billion. Strength was broad-based in segments and geographies, with digital experience revenue growing 12% year over year as demand remains high for the Experience Cloud and native applications. The digital media segment remains robust as well, with revenue growing 10% year over year.

Profitability was again in line with our long-term model, with non-GAAP operating margin coming in at 45.3%, compared with 45.0% a year ago and 45.8% last quarter. We have long been impressed with management’s ability to drive margins even in the face of high investment.

Unsurprisingly, artificial intelligence was the focus of Adobe’s quarterly results call, building on the company’s recent Summit announcements. Firefly in particular drew attention, with management focusing on the potential for seamless integration into existing products. Integration announcements have already been made for Photoshop, Illustrator, and Express. Since the Firefly Beta launched in March, users have created over half a billion generations, with Photoshop creation 80 times higher than Adobe projected.