Adobe shares slide as AI growth projections disappoint investors
2min read Adobe (ADBE) reported strong Q3 earnings, with EPS of $4.65 beating the consensus estimate of $4.53, and revenue rising 11% year-over-year to $5.41 billion, surpassing the estimated $5.37 billion. Despite the positive results, Adobe’s Q4 guidance slightly disappointed investors, forecasting EPS of $4.63-$4.68, in line with expectations, but revenue guidance of $5.50-$5.55 billion fell short of the anticipated $5.6 billion. This cautious outlook, paired with concerns about future growth, led to a 7.8% decline in Adobe’s stock price post-report.
Adobe's guidance weighed on investor sentiment, with Digital Media revenue forecasted between $4.09 billion and $4.12 billion, lower than the consensus of $4.14 billion. Digital Experience segment revenue guidance of $1.36 billion to $1.38 billion also came in below the estimated $1.4 billion, indicating potential challenges in these segments moving forward. Despite these concerns, the company expects to generate net new Digital Media ARR of $550 million in Q4, which is a promising sign for long-term growth.
In Q3, Adobe’s Digital Media segment delivered strong results, with revenue growing 11% year-over-year to $4.00 billion, beating expectations of $3.97 billion. Subscription revenue increased by 12%, reaching $5.18 billion, while product revenue declined by 15% year-over-year to $82 million, underperforming the estimate of $103.1 million. Despite the decline in product revenue, subscription growth helped Adobe maintain its overall revenue momentum.
The AI portion of Adobe's results was a key focus for investors. Adobe's Firefly AI-powered tool reached over 12 billion generations, demonstrating strong engagement. The company’s continued innovation in AI across its Creative Cloud, Document Cloud, and Experience Cloud segments is crucial to maintaining its leadership in the space. However, investor patience seems to be waning, as there is a desire to see more immediate revenue generation from these AI tools.
Adobe’s Document Cloud revenue grew 18% year-over-year to $807 million, driven by strong demand for Acrobat and AI-integrated tools. Creative revenue increased 10% to $3.19 billion, and the company added $504 million in net new Digital Media ARR, pushing total ARR to $16.76 billion. These figures reflect steady growth, but the softer Q4 outlook left investors questioning whether the momentum can be sustained in a challenging economic environment.
The company’s remaining performance obligations (RPO) came in at $18.14 billion, up 15% year-over-year, although this was slightly below the $18.26 billion estimate. R&D expenses rose 16% year-over-year to $1.02 billion, above expectations, as Adobe continues to invest heavily in its AI capabilities. Operating income on a non-GAAP basis was $2.52 billion, also slightly above the expected $2.47 billion, showcasing Adobe’s ability to balance growth and profitability.
Overall, Adobe’s Q3 performance was solid, but its cautious guidance and investor impatience for AI monetization weighed on the stock. While Adobe remains a leader in the digital media space and continues to innovate, the company faces growing competition and macroeconomic challenges that may pressure future growth. The upcoming launch of new AI-powered tools, such as the Firefly Video Model, and the company’s annual MAX conference could serve as important catalysts in the coming months.