ADBE's AI Push is Driving ARR: Can it Revive the Stock's Prospects?

Adobe’s ADBE Annualized Recurring Revenues (ARR) hit $26.06 billion exiting the first quarter of fiscal 2026, growing 10.9% year over year, driven by strong demand for Acrobat and Express, Creative Cloud Pro, Adobe Experience Platform (AEP) and apps, as well as GenStudio in the Enterprise. AI-first applications (including Firefly app and Firefly Enterprise) ARR tripled on a year-over-year basis, while total customers with ARR over $10 million grew by more than 20% year over year. Globally, AEP and apps, as well as Adobe GenStudio, saw ending ARR growth of more than 30% year over year. Acrobat AI Assistant ARR grew approximately 3 times year over year.

Firefly’s ending ARR across the Firefly app, Firefly credit packs and Firefly Enterprise exceeded $250 million. Firefly subscription and credit pack ending ARR grew 75% sequentially, reflecting strong Firefly momentum with generative credit consumption growing more than 45% quarter-over-quarter. Demand for video generative actions grew more than 8 times year over year, and audio generative actions doubled year over year, which reflected customers adopting AI-assisted creation across the full creative process.

Adobe expects ARR to grow 10.2% for fiscal 2026. However, ARR growth is expected to remain under pressure in the near-term due to higher monthly active users for freemium new AI offerings. Nevertheless, Adobe’s innovative portfolio and an expanding partner base are expected to drive ARR over the long term. Adobe boasts a rich partner base that includes the likes of NVIDIA, Amazon Web Services (AWS), Microsoft MSFT, Alphabet GOOGL, HUMAIN, OpenAI, among others. ADBE’s Firefly, Express and Creative Cloud applications currently integrate models from partners, including Google, OpenAI, Black Forest Labs, Luma, Runway, Topaz Labs and Eleven Labs.

Adobe is gaining traction among individuals, small and medium businesses and enterprises, thanks to Acrobat AI Assistant, as well as Express premium plans. This is expected to drive top-line growth in fiscal 2026. For fiscal 2026, Adobe expects total revenues between $25.9 billion and $26.1 billion. The Zacks Consensus Estimate for revenues is currently pegged at $26.06 billion, suggesting 9.6% growth over fiscal 2025’s reported figure.

Adobe Faces Tough Competition in the AI Domain

ADBE’s AI business is minuscule compared with Microsoft and Alphabet. Microsoft’s Intelligent Cloud revenues are benefiting from growth in Azure AI services and a rise in the AI Copilot business. Microsoft monetizes AI through existing customer relationships, reducing customer acquisition costs while expanding revenue per user. Microsoft’s $625 billion remaining performance obligations (RPO) and 15 million Microsoft 365 Copilot paid seats demonstrate robust enterprise demand and successful AI product adoption. In contrast, Adobe’s RPO hit $22.22 billion at the end of the first quarter of fiscal 2026.

Alphabet’s focus on leveraging AI to drive growth is a key catalyst. AI is infused heavily across its offerings, including Search and Google Cloud. AI Overviews and AI Mode are driving overall queries and commercial queries, thereby driving monetization opportunities. The launch of personal intelligence in AI Mode in search and the Gemini app bodes well for Alphabet’s prospects.

ADBE’s Share Price Performance, Valuation & Estimates

Adobe shares have lost 31.2% year to date, underperforming the broader Zacks Computer and Technology sector’s return of 5.6%.

Adobe Stock’s Price Performance

Image Source: Zacks Investment Research

ADBE stock is trading at a discount, as suggested by a Value Score of B.

In terms of forward 12-month price/sales, Adobe shares are trading at a lower multiple of 3.69 compared with the broader sector’s 5.86.

ADBE Stock is Cheap

Image Source: Zacks Investment Research

The Zacks Consensus Estimate for fiscal 2026 earnings is currently pegged at $23.51 per share, up 7 cents over the past 30 days, suggesting 12.3% growth from the figure reported in fiscal 2025.

Adobe Inc. Price and Consensus

Adobe Inc. price-consensus-chart | Adobe Inc. Quote

Adobe currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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