Fiery Flash: Not the stock chart Adobe had designed

Our Fiery Flash of the Week is Adobe, whose stock plunged more than 15% over the past week and roughly 34% over the past year, despite consistently exceeding earnings expectations. The recent sharp decline, triggered by Adobe's latest earnings release, has heightened investor concerns around the company's strategic direction and market positioning. Key factors behind this downturn include skepticism over Adobe's AI monetization strategy, intensifying competitive pressures, and broader macroeconomic uncertainty.

Adobe remains a global leader in software solutions, best known for its industry-standard Creative Cloud suite, featuring flagship products like Photoshop, Illustrator, and Premiere Pro. Additionally, its Document Cloud services, including Acrobat and PDF management tools, and Experience Cloud platform for marketing and analytics, make Adobe indispensable to creative professionals, businesses, and enterprises worldwide. This dominance translates into a powerful subscription-based revenue model, with Digital Media driving 73% of sales, followed by Digital Experience at 25%, and a smaller legacy Publishing and Advertising segment at 2%. Adobe’s growth is fueled by AI-powered innovations like Firefly and Sensei AI, enhancing creative workflows and enterprise analytics. However, as AI-driven competitors challenge its stronghold, Adobe’s future success hinges on monetizing its AI capabilities while maintaining its leadership in digital media and marketing technology.

The recent downturn in Adobe's stock is primarily attributed to its fiscal first-quarter earnings report and the subsequent guidance for the upcoming quarter. While the company reported record revenue of $5.71 billion for the quarter, a solid 10% year-over-year increase, investors were disheartened by the conservative outlook for the next quarter. For the second quarter, Adobe expects revenue to range between $5.77 billion and $5.82 billion (an 8.6% to 9.6% year-over-year increase) and an adjusted EPS between $4.95 and $5.00. While this aligns closely with analysts' estimates, it lacks the robust double-digit sales growth that investors have come to expect from Adobe. Since 2015, the company has consistently reported annual revenue growth of at least 10%, peaking at 28% in 2019. However, for this fiscal year, Adobe aims for growth between 8.3% and 9.5%, not what it use to be.

The tech industry has been experiencing an AI boom since the launch of ChatGPT and other generative AI tools like Midjourney. AI infrastructure companies such as Nvidia and Arista have made significant strides. In a second wave Investors are closely watching how traditional software companies like Adobe, adapt to and monetize AI technologies. While AI monetization for software companies is still in its early stages, we see 2026 as a crucial year for material revenue uplifts. For Adobe, the market’s AI-driven optimism is based on its potential to monetize AI-powered creative tools like Firefly, which could drive higher subscription revenue and user engagement. The company has framed AI as a generational opportunity to reimagine its technology platforms and serve an increasingly large and diverse customer base. Adobe outlines its AI strategy in three key areas: 1/ Innovation; 2/ Usage tracking and 3/ Value and monetization. This publication, Adobe for the first time disclosed that its annualized recurring revenue (ARR) from AI was $125 million in the last quarter, just 0.6% of total revenue. While CEO Shantanu Narayen expressed confidence in doubling this figure to $250 million by the end of the fiscal year, still this would only represent 1% of total revenue. Not really a short term game changer.

At the same time, Adobe faces the risk of disruption from generative AI competitors such as OpenAI, Canva, and Figma. These companies offer lower-cost or free AI-powered design tools that could erode demand for Adobe’s premium software. On the competition front, there also seems to be some movement in Figma’s IPO plans. Following the collapse of Adobe’s $20 billion acquisition of Figma in late 2023 due to regulatory challenges, Figma is now reportedly exploring an initial public offering (IPO) as early as this year.

Beyond company-specific factors, broader market sentiment has also weighed heavily on Adobe’s share price, in our view. Geopolitical uncertainties, notably President Donald Trump's recent threats to impose new tariffs on the European Union and other trading partners, have contributed to market volatility, a bit surprisingly also among tech stocks, where investors have been actively panic-selling. Arguably, a bit too much. This also seems to be case for Adobe, as its valuation appears rather attractive. The stock trades at a trailing P/E ratio of 25x and a forward P/E of 18.5x, suggesting a compelling entry point compared to industry peers and the company’s historical trading multiples. One would almost forget that Adobe is still expected to grow its top line at a high single-digit rate while generating close to 90% gross margins, 45%+ EBIT margins, and 40%+ free cash flow margins. You would even think investors are being a bit too complacent. Adobe needs just one catalyst, and the stock could take off.