How Adobe quieted the doubters to send its stock cruising after earnings

By Emily Bary

The stock could clinch its largest single-day percentage gain in four years upon Creative Cloud momentum that helped silence concerns about AI threats

Adobe Inc. faced its share of doubters heading into earnings, but the report came as a welcome relief.

Shares of Adobe (ADBE) were up 13.9% in premarket trading Friday, which would translate to their best single-day percentage gain since a 17.7% rise seen on March 13, 2020, assuming the current action carries through to the close.

Read: Adobe surfs AI wave to post record revenue as its stock soars after earnings

JPMorgan's Mark Murphy upgraded the stock in the wake of the report, saying that he and his team "see smoother sailing ahead and material upside just for the stock to get back to its prior highs and catch up with the broader markets"

"We see a decent likelihood that investors are stuck in a Firefly trough of disillusionment currently, and our sense is that monetization could start to gradually build in the 2H and into next-year," Murphy wrote, referring to the company's Firefly artificial-intelligence offering that lets creative professionals generate art and more.

The key from Thursday afternoon's earnings report? Investors had been worried about Creative Cloud's net new annual recurring revenue moving lower recently, but Adobe expects it to be up on a year-over-year basis in both the fiscal third and fiscal fourth quarters.

That reflects how pricing will turn into a "tailwind," according to Murphy, "an impending trend change in one of the most critical metrics." He now rates the stock at overweight, up from neutral before, with a target of $580, up from $570 previously.

The maker of Photoshop and other creative tools won credit even from an analyst who had recently downgraded its stock.

Adobe's forecast for the fiscal year "basically implies consensus estimates for [the second half] in aggregate do not need to be lowered materially despite a stronger dollar headwind and [net new annual recurring revenue] estimates can be maintained," wrote Melius Research analyst Ben Reitzes, who had moved to a hold stance and $510 target price earlier this week.

"Clearly, this guidance is better than feared - and frankly, we would not have been surprised to see net new ARR for FY24 cut at least a little given macro pressures on software and given creative customers may be evaluating new entrants," he added.

That's even as he's still "cautious overall that customers are willing to pay extra for AI features over the long term given an increase in competition and overall inflation."

Evercore ISI's Kirk Materne said the latest numbers "help highlight the durability of Adobe's Creative business and the early impact from Firefly (and Express)" on Creative Cloud net new annual recurring revenue.

"While the huge pop in the shares in the after-market illustrates just how negative sentiment had become, we believe that the outlook remains attractive on a risk/reward basis as adoption of [generative] AI services across Adobe's platform continues to accelerate," Materne wrote, as he stuck with his outperform rating and $650 target price.

Bernstein's Mark Moerdler had a similar take on the magnitude of Adobe's stock bump.

"It is important to note that part of the strength in reaction is due to the fact that Adobe's stock had been down 23% [year-to-date] going into the quarter and the massively depressed multiple," he wrote. "Combined with the nervousness that had been created by some other recent software company earnings, it makes sense that the stock was up so much."

But that's not to say there weren't positive indicators in the report, including the beat on net new annual recurring revenue.

That performance "indicates that Adobe is not being impacted by competitive AI-driven technology threats, which takes the pressure off what has been an important concern amongst investors," Moerdler wrote.

"Secondly, the guidance raise shows that they are not seeing and feeling the macro problems that some other software companies have reported in this quarter, such as Salesforce and Workday - both of which reduced forward guidance," he added.

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Moerdler has an outperform rating and $660 price target on the shares, up from $653.

-Emily Bary

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06-14-24 0811ET

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