Adobe shares plunge on downbeat forecast and competition worries

Adobe shares plunge on downbeat forecast and competition worries

Mar 15,2024
Despite a robust fiscal year 2024 first quarter, the company anticipates a downturn in the second quarter as competition from other artificial intelligence companies grows.
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Adobe released its Q1 fiscal year 2024 earnings on Thursday, posting record Q1 revenue. However, despite the company's stellar first quarter performance, it shared downbeat forecasts for its second quarter. This was mainly due to increased anxieties about higher competition regarding its current Artificial intelligence products.

Adobe shares plunged 12.1% to €461.8 on Thursday, following the earnings release, as spooked investors rushed to sell.

Referring to Q1's results, company CEO and chairman Shantanu Narayen said in a press release: "Adobe drove record Q1 revenue demonstrating strong momentum across Creative Cloud, Document Cloud and Experience Cloud. We've done an incredible job harnessing the power of generative AI to deliver groundbreaking innovation across our product portfolio."

Dan Dum, chief financial officer (CFO) and executive vice president of the company, said in the press release: "Adobe's Q1 results and record RPO reflect strong customer adoption of our innovative products and services."

The company also announced a $25 billion (€22.9 billion) share buyback programme, however, whether that's enough to soothe investor anxieties is yet to be seen.

Why is the Q2 outlook for Adobe dampened?

The company has shared that it sees earnings per share on an adjusted basis touching somewhere between $4.35 and $4.40 in the fiscal second quarter. The bottom range of that is slightly less than the $4.38 expected by London Stock Exchange Group (LSEG) analysts.

Similarly, Adobe forecast second quarter revenue to be somewhere between $5.25 billion and $5.30 billion, less than the previously expected $5.31 billion.

Investors are concerned about increased competition from other AI companies such as Midjourney and Stability AI, which are looking to muscle in on Adobe's graphics sector share.

There have also been increasing worries about Adobe being slower to monetise its AI products and tools than investors would ideally like, by looking to push more adoption of the tools for now, rather than generate high income from them.

As far as Firefly - a generative AI creative tool and a key Adobe product - is concerned, the company has chosen not to restrict volume limits, which may drive up revenue, but  focus instead on higher usage.

As such, any significant monetisation of these tools could very well be pushed to late 2024 or even 2025. Price increases for these tools last year have also had a significant impact on the number of customers currently willing to pay for Adobe's products.

AI in general, could also turn out to be a negative in some aspects for the company, as it can automate several of the tasks that Adobe users still do manually. This could lead to less demand for Adobe's products down the line, further chipping away at its competitiveness.

The company has also recently had to let go of a $20 billion (€18.4 billion) merger with Figma, a cloud-based designer platform, due to regulatory challenges.

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