ADBE shares slide as ARR decelerates, guidance misses

Adobe's fiscal Q4 earnings exceeded Wall Street expectations, delivering adjusted EPS of $4.81 compared to the consensus estimate of $4.67, and revenue of $5.61 billion, above the $5.54 billion forecast. Year-over-year, EPS grew from $4.27, while revenue rose 11% from $5.05 billion. Key highlights included subscription revenue of $5.37 billion, up 13%, beating the $5.28 billion estimate. Despite these beats, Adobe’s forward guidance, particularly for fiscal 2025, disappointed investors, contributing to significant stock price pressure.

The company's Q4 performance in its core Digital Media segment generated $4.2 billion in revenue, a 12% increase from the prior year, aligning with estimates. However, net new ARR in Digital Media grew by only 2% year-over-year, a marked deceleration compared to 9% growth in the prior quarter. Adobe's FY2025 guidance for ARR growth of 11% further emphasized this slowdown, raising concerns about the sustainability of growth, particularly as pricing tailwinds fade.

Drivers behind Adobe’s performance included strong execution in Digital Media and Digital Experience segments, reflecting innovation in AI-driven tools like Firefly. However, analysts noted a prioritization of AI adoption over immediate monetization, which has created growth deceleration risks. Additionally, new go-to-market changes expected in Q1 may introduce short-term disruption. Broader macroeconomic factors, including a forecasted $200 million FX headwind for FY2025, also weighed on guidance.

The stock experienced sharp price action, falling nearly 12% in premarket trading after the release. By mid-Thursday, Adobe’s shares had dropped over 10%, reflecting investor disappointment in FY2025 guidance for revenue ($23.30-$23.55 billion vs. $23.78 billion consensus) and adjusted EPS ($20.20-$20.50 vs. $20.52 consensus). Analysts, including TD Cowen and Stifel, revised price targets downward, citing weaker-than-expected Digital Media growth and operational margin pressure.

Valuation remains a concern as Adobe struggles to deliver a "beat-and-raise" cadence. The stock’s 12-month forward P/E ratio of 26.46 is below peers like Autodesk (33.63), signaling diminished investor confidence. This underperformance is underscored by Adobe’s 8% year-to-date stock decline compared to a 27.6% gain for the S&P 500 and a 33% surge in the tech-heavy Nasdaq Composite.

Despite the challenges, Adobe highlighted growth in monthly active users, which rose 25% year-over-year to 650 million. Management emphasized the importance of generative AI, with CFO Dan Durn pointing to its “meaningful impact” on financials. However, the lack of explicit monetization metrics has left Wall Street skeptical about the timeline for AI-driven revenue growth.

Looking ahead, Adobe plans to introduce higher-tiered AI offerings, including premium Firefly tools, aiming to drive ARPU growth. Analysts believe this approach could yield results over time but expressed concern about its near-term impact given fading pricing benefits and uncertain AI monetization. Compounding this, mixed sentiment from recent market checks suggests potential headwinds in execution.

In conclusion, while Adobe delivered a strong Q4 and demonstrated ongoing innovation, its underwhelming guidance and slower growth trajectory have created a disconnect between management’s optimism and investor sentiment. To regain long-term investor confidence, Adobe will need to provide clearer visibility on AI monetization and return to consistent outperformance in both revenue and earnings.