Adobe Drops 9% Post Q2 Results: Should You Buy the Stock on the Dip?

Adobe ADBE shares have dropped 8.6% since the company reported second-quarter fiscal 2025 results on Thursday (June 12) last week. The drop reflects modest revenue growth prospects in the near term, as the company continues to face 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.

Adobe’s AI business is minuscule compared with the likes of Microsoft and Alphabet GOOGL. Microsoft’s Intelligent Cloud revenues are benefiting from growth in Azure AI services and a rise in AI Copilot business. Alphabet’s focus on leveraging AI to drive growth is a key catalyst. AI is infused heavily across its offerings, including Search, Google Cloud and Pixel. Adobe is also facing stiff competition from DocuSign DOCU in the document services & e-signature domain.

However, second-quarter fiscal 2025 results indicated that Adobe 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 exited the fiscal second quarter with Digital Media ARR of $18.09 billion, up 12% year over year.

ADBE Stock’s Performance

Is this encouraging enough for investors to buy Adobe shares? Let’s dig deep to find out.

Solid Q2 Results and Positive Fiscal 2025 View Good for ADBE

Adobe reported second-quarter fiscal 2025 non-GAAP earnings of $5.06 per share, which beat the Zacks Consensus Estimate by 2.02% and increased 12.9% year over year. Total revenues were $5.87 billion, which beat the consensus mark by 1.50% and increased 11% year over year on a reported basis and a constant-currency (cc) basis.

Digital Media revenues were $4.35 billion (74% of total revenues), up 11% year over year on a reported basis and 12% on a cc basis. The figure surpassed the Zacks Consensus Estimate by 1.77%. Business Professionals and Consumers' group subscription revenues were $1.60 billion, 15% year over year. Creative and Marketing Professionals Group subscription revenues were $4.02 billion, 10% year over year.

Digital Experience revenues of $1.46 billion (25% of total revenues) increased 10% year over year, both on a reported and cc basis. The figure beat the consensus mark of 1.56%. The company’s growth was driven by a strong demand for Customer Experience Orchestration solutions, which integrate content, data and journeys, as well as AI-infused tiered offerings like Adobe Experience Platform and GenStudio for Performance Marketing.

Adobe now expects revenues between $23.5 billion and $23.6 billion ($21.51 billion in fiscal 2024), up from the previous guidance range of $23.3-$23.55 billion. Fiscal 2025 non-GAAP earnings are now expected between $20.50 per share and $20.70 per share ($18.42 per share in fiscal 2024), higher than the previous guidance of $20.20-$20.50 per share. 

For fiscal 2025, Digital Media Annual Recurring Revenue is still expected to grow 11% year over year. Digital Media segment revenues are expected to be between $17.45 billion and $17.50 billion. Digital Experience segment revenues are expected between $5.8 billion and $5.9 billion, while Digital Experience subscription segment revenues are expected between $5.375 billion and $5.425 billion.

ADBE’s Fiscal 2025 Estimate Revision Shows Upward Trend

For fiscal 2025, the Zacks Consensus Estimate for earnings is pegged at $20.60 per share, up by 14 cents over the past 30 days. The figure indicates 11.83% growth over fiscal 2024.

The Zacks Consensus Estimate for third-quarter fiscal 2025 earnings is pegged at $5.16 per share, up 1.8% over the past 30 days, suggesting 10.97% growth from the year-ago quarter.

Adobe’s Innovative Portfolio Boosts Prospects

Adobe’s tools, like Acrobat AI Assistant and Adobe Express, are attracting business professionals and creators. Acrobat AI Assistant uses conversational interfaces to make it easier for users to read digital documents and gain insights within a short timeframe. Adobe Express is using AI to enable consumers to quickly design and publish content through conversational AI in an easy-to-use, all-in-one application. Adobe is integrating these solutions to facilitate a smoother creation-to-consumption process across mobile apps, web browsers and desktop offerings. Adobe’s monthly active users across these categories surpassed more than 700 million users at the end of the second quarter of fiscal 2025. 

Adobe’s 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, and its support for third-party models, including from Alphabet division Google’s Imagen and Veo, Microsoft-backed OpenAI’s image generation and Black Forest Labs’ Flux, is a key catalyst. Adobe Firefly App availability on mobile is expected to further boost its popularity.

Adobe Stock Trades at a Premium

Adobe shares are also overvalued, as suggested by a Value Score of D. 

ADBE stock is trading at a premium, with a forward 12-month price/sales of 6.54X compared with the broader Zacks Computer and Technology sector’s 6.36X, Alphabet’s 6.13X and DocuSign's 4.71X.

Price/Sales Ratio (F12M)

Conclusion

Adobe’s focus on improving monetization of its AI tools is a positive for investors despite a premium valuation and stiff competition. ADBE currently has a Zacks Rank #2 (Buy) and a Growth Score of A, a favorable combination that offers a strong investment opportunity, per the Zacks Proprietary methodology. 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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