Firefly App And AI Assistants Will Attract New Users

Key Takeaways

• Adobe's investment in AI features and Firefly app tiers may boost revenue and margin through upsells and broader user engagement.
  
• Expanding web/mobile solutions and partnerships can drive revenue growth, catering to evolving creator needs and enhancing market reach.
  
• Reliance on AI for growth and execution risks in new subscriptions, alongside economic, competitive, and regulatory challenges, may strain Adobe's revenue and margins.

Catalysts

Operates as a technology company worldwide.

• The rollout of Adobe's Firefly app with multiple subscription tiers, including support for third-party models, is expected to attract a broader base of individual and enterprise users, potentially increasing recurring revenue from Creative Cloud offerings.
  
• Adobe's continued investment in AI-assisted features like Acrobat AI Assistant and AI-driven generative services are likely to enhance product stickiness and create new upsell opportunities, potentially boosting net margins through higher-value product offerings.
  
• Expansion and integration of Adobe's web and mobile product solutions, such as Photoshop on web and mobile, could cater to the evolving needs of next-gen creators and professionals, driving revenue growth through increased user adoption and new monetization models.
  
• Strengthening partnerships and broader ecosystem engagement with major software providers and service integrators are anticipated to extend Adobe's market reach and drive revenue through improved SMB and enterprise sales channels.
  
• The strategic focus on AI and data-driven features, including GenStudio and Experience Cloud, may enable Adobe to offer more comprehensive customer journeys and unlock new levels of marketing campaign efficiency, potentially leading to higher earnings as enterprises prioritize content personalization at scale.

Adobe Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Adobe compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Adobe's revenue will grow by 7.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 30.6% today to 29.5% in 3 years time.
• The bearish analysts expect earnings to reach $8.0 billion (and earnings per share of $18.9) by about May 2028, up from $6.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 22.5x on those 2028 earnings, down from 24.2x today. This future PE is lower than the current PE for the US Software industry at 33.3x.
• Analysts expect the number of shares outstanding to decline by 3.88% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.72%, as per the Simply Wall St company report.

Adobe Future Earnings Per Share Growth

Risks

• Investors are concerned about Adobe's reliance on AI integration as a significant driver of future growth, which may not materialize as expected, potentially impacting future revenue growth and profitability.
  
• The introduction of new subscription tiers such as Firefly could carry execution risks, especially if they fail to attract and monetize the predicted user base, possibly affecting Adobe’s revenue streams and earnings.
  
• Economic headwinds, such as potential consumer spending downturns or reduced advertising activity, could negatively influence Adobe's key customer segments, impacting revenue growth and operating margins.
  
• Competition from other creative software providers and emerging AI-driven tools might pressure Adobe to continuously innovate, which could strain margins and increase operational costs.
  
• Regulatory and data privacy challenges, particularly those related to AI usage and the management of customer data, could impose additional compliance costs and impact net margins.

Valuation

• The assumed bearish price target for Adobe is $380.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Adobe's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $630.0, and the most bearish reporting a price target of just $380.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $27.0 billion, earnings will come to $8.0 billion, and it would be trading on a PE ratio of 22.5x, assuming you use a discount rate of 7.7%.
• Given the current share price of $382.98, the bearish analyst price target of $380.0 is 0.8% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.