Adobe Shares Plunge 13% as AI Growth Concerns Overshadow Strong Earnings

Adobe Inc. (NASDAQ:ADBE) shares took a significant hit on Thursday, falling about 13% as investors grappled with the company's latest earnings report and AI-related disclosures. Despite reporting better-than-expected Q1 results, with EPS of $5.08 versus $4.97 consensus and revenue of $5.71 billion ahead of the $5.66 billion Street estimates, the market's reaction was overwhelmingly negative. The company's Q2 and full-year FY25 guidance fell slightly short of consensus, raising concerns about its growth trajectory and AI monetization efforts.



The primary concern for investors appears to be Adobe's AI-related disclosures. The company disclosed that annual recurring revenue (ARR) from standalone AI products is expected to reach approximately $250 million by year-end, representing about 1% of the company’s fiscal 2025 revenue guidance. While AI adoption showed positive momentum, the relatively small contribution of AI revenue to the overall revenue highlights the limited impact of AI on the company's growth at this stage. This has led to questions about Adobe's ability to effectively monetize its AI portfolio and drive significant growth through AI initiatives.

Adobe's decision to remove segment-level ARR disclosures for Creative Cloud and Document Cloud has also raised concerns among investors and analysts. Jefferies analysts highlighted this issue, noting that the lack of detailed segment-level disclosures makes it more difficult to directly compare the performance of these key segments over time. This decision has led to questions about the company's commitment to transparency and has made it harder for investors to assess the health and growth of specific business units within Adobe. For instance, while Adobe reported continued stability in its Creative Cloud segment, the absence of specific ARR breakdowns has made it challenging for analysts to validate this claim with precise data. This lack of transparency can erode investor confidence, as it reduces the ability to make informed decisions based on detailed financial metrics.



Adobe's fiscal 2025 outlook projects a 9% revenue growth and an operating margin of about 46%. This represents a slowdown compared to its fiscal 2024 performance, where the company achieved an 11% revenue growth and a 46.6% operating margin. The slowdown in growth can be attributed to several factors, including negative market reaction to AI disclosures, guidance shortfall, limited AI revenue contribution, changes in segment-level disclosures, and deceleration in RPO growth.

Despite the market reaction, some analysts remain optimistic about Adobe's long-term prospects. Goldman Sachs analyst Kash Rangan reiterated a Buy rating on Adobe with a $640 price target, noting that if the revenue momentum from AI products like Firefly App and Services and GenStudio for Performance Marketing continues, it could mark an inflection point in how investors perceive Adobe's growth durability over the next 3-4 years. JPMorgan analyst Mark Murphy maintained an Overweight rating and lowered the price target from $580 to $540, highlighting Adobe AI products like Acrobat AI Assistant, Firefly App and Services and GenStudio for Performance Marketing hitting over $125 million in bookings in the first quarter. Piper Sandler analyst Brent Bracelin maintained an Overweight rating with a $600 price target, calling Adobe's first-quarter financial results a "solid start" to fiscal 2025.

In conclusion, while Adobe's AI-related disclosures and revenue projections present opportunities for long-term growth and increased market valuation, they also come with risks and uncertainties that could impact its stock performance. Investors will need to closely monitor Adobe's AI monetization efforts and overall financial performance to make informed decisions about the company's future prospects.