In the First Quarter (Q1) of fiscal year 2024, Adobe beat earnings and revenue expectations. One of the take-home messages of the earnings call webcast was that monetization of AI related features would be apparent in the second half (H2) of the fiscal year (Adobe fiscal year ends in very early December, so H2 would start in very early June). While Adobe beat analyst earnings and revenue expectations for Q1, its guidance, predicted rev and earnings for Q2 2024, was less than what analysts had expected, calculated. Did this affect their financial discounted cash flow models, which determine whether the stock price represents a worthwhile purchase point? Presumably this is why the stock briskly sold off about 13% after the earnings release. If we go ahead and attribute a rational justification to the revaluation. Company leadership, including CEO Narayen, repeatedly stated that guidance of predicted revenue and earnings for the entire fiscal year 2024, which had been made at the earnings release for q4 2023 as per custom, were unchanged, and that accelerated usage of apps and forthcoming monetization of AI related features was proceeding apace and quite satisfactorily. The CEO outlined that the accelerating proliferation of digital content resulting from the spread of AI related software, increases demand for the Adobe suite of media editing software, which is the best positioned to effectively function in a commercial environment in which copyright must be respected, and in which the digital content editing process must integrate in the corporate workflow, which includes related downstream usage for digital marketing.
I am making no change in allocation to ADBE. Why do I choose to trust the leadership word that revenue and earnings will remain satisfactory this year? ADBE consistently beats rev and EPS expectations. This can be easily seen for example on the https://www.msn.com/en-us/money personal investing website. Find ADBE, earnings, earnings history. More fundamentally, the competitive advantage of ADBE enables it to successfully compete with potential rivals. This competitive advantage lies, just as CEO Narayen outlined, in the market dominating position of Adobe creative software in companies. Adobe is reinforcing and adapting its market dominance here by adding the new capability of AI. As AI is integrated progressively into creative and digital marketing software applications, on one hand it becomes more efficient to create sophisticated content and use it more effectively in digital marketing. This raises value provided per cost to the client. Just because AI may mean that fewer professional designers are required in existing projects, does not mean they won’t be employed in new projects elsewhere. On the other hand, AI tools mean content creation becomes easier and can be used more widely in the enterprise and out of it, by non-professional creators. In fact, overall demand for digital content creation is accelerating and this means more demand for Adobe software.