Adobe stock dips but Street remains positive on generative AI opportunities ahead
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Adobe (NASDAQ:ADBE) stock dipped ~4% on Friday despite Q3 results beating estimates and Wall Street remaining positive on the company.
BMO Capital Markets raise its target price on ADBE to $645 and retained its Outperform rating as well as top pick designation on Adobe.
BMO's analysts said that Adobe delivered a solid quarter and guidance, however expectations were high, and the Q4 ARR outlook seems conservative.
But, the analysts believe that investors should consider that Adobe has a multi-year meaningful generative AI opportunity, steered by new solution enhancements beyond the four announced solutions, to include areas such as Document Cloud; incremental user growth, incremental price opportunities; and usage/consumption growth.
Goldman Sachs reiterated its Buy rating and raised its price target on the stock to $625 from $550 as it continues to see Adobe as a beneficiary of Gen-AI.
With the stock up about 12% since reporting Q2, compared to Nasdaq +1%, investors are also likely grappling with the in-line Q4 outlook, Goldman Sachs' analysts noted.
The firm sees Adobe's speed to monetize these offerings , starting Nov. 1, as a strategic shift from its long-formed PLG strategy. The analysts expect initial traction from net new users over the coming months, with the price increase's impact gradually flowing through the model over the next three years.
The analysts see the 6-10% price increases, across certain Creative Cloud plans, as properly capturing robust customer demand while offsetting the high-cost of these services.
With Betas seeing strong engagement, Adobe is likely to steer healthy top-of-funnel conversion leading to pronounced ARPU growth. The company's incorporation of credit consumption in its pricing strategy also introduces another upside lever to growth, according to the analysts.
Morgan Stanley kept its Overweight rating on Adobe and noted that Digital Media net new annual recurring revenue, or ARR, 12% ahead of consensus showed impressive momentum in the core business.
The analysts added that an initial look into the scope of Gen-AI opportunities ahead for Adobe was even more impressive. Combined, the analysts are more confident in their above consensus FY24 forecasts, keeping them firmly Overweight on the stock.
The Digital Media net new ARR was $464M beating consensus by ~12%, the first quarter since FY21 that the company has grown net new ARR on a year-over-year basis excluding pricing benefits, the firm noted.
The analysts said that the Q3 conference call showed the scope of Generative AI opportunities ahead for the company, with focus on proliferation, more models to come, and that Document Cloud is still not in the Generative-AI mix.
Meanwhile, Wells Fargo Securities kept its Overweight rating and raised its price target on ADBE to $650 from $625.
Wells Fargo's analysts said that generative AI monetization details help set the stage for next month's Max conference, where they expect the AI product roadmap will expand.
Adobe has a Hold rating at Seeking Alpha's Quant Rating system, which consistently beats the market. The Seeking Alpha authors' average rating is more positive with a Buy and the average Wall Street analysts' rating is also Buy.

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