Key Points:
- Growth Slows: Adobe’s Q3 revenue and EPS growth hit decade-low levels.
- AI Disruption: Emerging AI tools threaten Adobe’s creative software edge.
- Investor Doubts: Downgrades reflect weak innovation and AI strategy concerns.
Adobe Inc. is under scrutiny as its upcoming Adobe Q3 earnings are expected to show slower revenue growth, reinforcing investor concerns about the company’s ability to compete in an AI-driven software landscape. Wall Street anticipates Adobe’s full-year sales growth to hit nearly 10%, a rate that would mark its slowest expansion in over a decade. Analysts expect growth to continue receding through fiscal 2028, raising doubts about Adobe’s long-term prospects.
Slowing Growth and AI Competition Weigh on Outlook
Adobe’s core business—creative software for professionals—is increasingly threatened by artificial intelligence tools capable of generating images and editing content rapidly, reducing demand for traditional software. Despite Adobe’s investment in AI-driven products, Adobe Q3 earnings reflect market skepticism, as its offerings are seen as insufficient to fend off disruption from newer players. Shares have fallen more than 20% this year and over 40% since the end of 2023, while software-focused exchange-traded funds have surged by more than 40%.
“AI image generation that replaces stock photography and image-editing software is the most obvious example of where we’re already seeing disruption,” said Brian Barbetta, co-leader of Wellington Management’s Technology Team. “AI companies are growing so quickly that it really seems like it is coming at the expense of legacy names.”
Adobe’s stock now trades at less than 16 times earnings, close to its lowest valuation in over a decade, signaling investor caution. Its fiscal third-quarter report is projected to show revenue growth of 9.3% and net earnings per share expanding by 7%.
Mixed Investor Sentiment and Possible Turnaround
Despite these concerns, not all investors are bearish. Adobe Q3 earnings haven’t shaken analyst confidence, as more than two-thirds of analysts still recommend buying Adobe, a higher ratio than that of other technology giants like Apple. The company is trading over 35% below its average analyst price target, offering one of the largest implied returns in the S&P 500 tech sector.
Some experts, however, caution that low valuations may not signal opportunity if AI-driven competition continues to undermine Adobe’s core business. “If a company is truly facing risk of disruption, forward estimates are often wrong,” Barbetta added, warning that cheaper stock may not be as attractive as it seems if the company struggles to maintain pricing power and customer demand.
Others remain cautiously optimistic, pointing to companies like Snowflake Inc., which have successfully navigated AI-related risks while expanding their platforms. Keith Weiss, an analyst at Morgan Stanley, noted that investors should focus on incumbents capable of leveraging AI rather than chasing new entrants. Adobe Q3 earnings, supported by its established customer base, strong margins, and steady growth make it a candidate for such a transition.
Conrad van Tienhoven, a portfolio manager at Riverpark Capital, holds a small stake in Adobe and believes that the market’s pessimism presents an opportunity. “Adobe continues to offer good growth, great margins, and now at a very cheap valuation,” he said. “While there are concerns about its future, the market has already decided it is going to be a loser. That’s the opportunity. If Adobe gets AI right, at this valuation, it could be a huge success.”
Adobe Q3 earnings will be closely watched, as investors weigh the company’s ability to compete amid fast-changing technology trends. Whether Adobe can pivot and harness AI for sustainable growth will determine if it can reverse its slide or remain sidelined by newer players in the market.
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