Buy, Sell or Hold Adobe Stock? Key Tips Ahead of Q3 Earnings

Adobe ADBE is set to report its third-quarter fiscal 2025 results on Sept. 11.

For third-quarter fiscal 2025, Adobe projects total revenues between $5.87 billion and $5.92 billion. The company expects non-GAAP earnings between $5.15 and $5.20 per share.

The Zacks Consensus Estimate for revenues is pegged at $5.9 billion, suggesting growth of 9.09% from the year-ago quarter’s reported figure. The consensus mark for earnings has been unchanged at $5.17 per share over the past 30 days, indicating 11.2% growth from the figure reported in the year-ago quarter.

ADBE’s earnings beat the Zacks Consensus Estimate in all the trailing four quarters, the average earnings surprise being 2.53%.
 

Adobe Inc. Price and EPS Surprise

Adobe Inc. price-eps-surprise | Adobe Inc. Quote

Let us see how things have shaped up for ADBE stock prior to this announcement.

Factors to Note Prior to ADBE’s Q3 Earnings

Adobe faces stiff competition in the AI and Generative AI (GenAI) space from the likes of Microsoft MSFT-backed OpenAI, as well as a lack of monetization of its AI solutions. The challenging macroeconomic environment has been a headwind for Adobe’s prospects. Adobe’s AI business is minuscule compared with the likes of Microsoft and Alphabet GOOGL. These factors are expected to have negatively impacted Adobe’s third-quarter fiscal 2025 results.

Adobe has been harnessing AI to power solutions like GenStudio and Firefly Services, which have gained strong adoption. Adobe’s tools, like Acrobat AI Assistant and Adobe Express, are attracting business professionals and creators. The company is witnessing steady growth across the family of Acrobat and Express products, with combined monthly active user growth accelerating to more than 25% year over year and crossing 700 million monthly active users at the end of the fiscal second quarter. 

Adobe’s investments in conversational experiences in Acrobat and Gen AI models in Express are noteworthy. The combination of these two products is helping business professionals and consumers gain insight and create presentations much faster. Its strategy of offering an AI-powered, comprehensive creative platform that extends from idea generation through creation to mass production and delivery is addressing the needs of Creative and Marketing Professionals.

Firefly is enhancing the capabilities of Creative Cloud desktop applications. The Firefly App is attracting users for AI-powered content ideation, creation and production. Its support for third-party models, including from Google’s Imagen and Veo, Microsoft-backed OpenAI’s image generation and Black Forest Labs’ Flux, has been a key catalyst.

These factors are expected to have benefited top-line growth in the to-be-reported quarter. For the third quarter of fiscal 2025, Adobe expects Digital Media segment revenues between $4.37 billion and $4.40 billion. Digital Experience segment revenues are anticipated to be in the range of $1.45-$1.47 billion. The Zacks Consensus Estimate for Digital Media and Digital Experience is pegged at $4.39 billion and $1.46 billion, respectively.

ADBE Shares Underperform Sector, Industry

Year to date, Adobe shares have declined 20.4%, underperforming the broader Zacks Computer and Technology sector’s return of 15.9% and the Zacks Computer Software industry’s appreciation of 15.2%. Adobe shares have underperformed Microsoft, Alphabet and Apple AAPL. Over the same time frame, Microsoft and Alphabet returned 19% and 26.8% while Apple shares dropped 8.8%. 

Adobe Stock’s Performance

The ADBE stock is not so cheap, as the Value Score of C suggests a stretched valuation at this moment.

In terms of the forward 12-month price/book, Adobe’s shares are trading at 13.12X, higher than the sector’s 10.55X, Microsoft’s 10.79X, and Alphabet’s 7.99X but lower than Apple’s 52.83X.

Adobe Stock’s Valuation

Can a Strong Portfolio Boost ADBE’s Prospects?

Adobe’s second-quarter fiscal 2025 results indicate that the company is catching up through the expansion of its AI portfolio with GenStudio and Firefly Services. Adobe’s AI book of business from AI-first products, including Acrobat AI assistant, Firefly App and Services and GenStudio for Performance Marketing, is tracking ahead of the $250 million ending Annual Recurring Revenue (ARR) target by the end of fiscal 2025.

The company’s latest Acrobat Studio, which unites Adobe Acrobat, Adobe Express and AI agents, is expected to help Adobe expand its footprint among business and creative professionals, as well as students. Acrobat Studio converts PDFs into a conversational knowledge hub that users, with the help of a customizable AI assistant, can delve into to gain insights, answers and recommendations. Adobe Express creation tools and templates, as well as Firefly-powered image and video generation tools, can then be used to create content from the gathered information.

Conclusion

Adobe’s prospects benefit from strong demand for its creative products. However, Adobe is suffering from increasing competition in the GenAI space from the likes of OpenAI, as well as a lack of monetization of its AI solutions.

Adobe currently has a Zacks Rank #4 (Sell), suggesting that it may be wise to avoid the stock ahead of the fiscal third quarter results.

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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