After the closing bell on Thursday, Adobe (NASDAQ: ADBE) reported fiscal third-quarter results that beat analysts’ expectations. Still, shares of the enterprise software company were trading down more than 9% Friday afternoon, and it appears the company’s disappointing guidance for the current quarter was the primary driver of the sell-off.
Unexpected headwind blows
For the period ended Aug. 30, Adobe turned $5.41 billion in revenue into operating/non-GAAP earnings of $4.65 per share. Both numbers were well above year-ago results of $4.89 billion and $4.09 per share, and beat analysts’ consensus expectations for top line revenue of $5.37 billion and earnings of $4.53 per share.
The company’s near-term outlook, however, left much to be desired. For the fiscal fourth quarter, which ends in November, Adobe expects to report revenue of $5.5 billion to $5.55 billion and non-GAAP earnings per share of $4.36 to $4.68. Analysts’ consensus estimates for the fourth quarter were $5.61 billion and $4.67, respectively.
Notably, Adobe’s forecast that its digital media business will generate just $550 million in annual recurring revenue in the fourth quarter is significantly lower than analysts’ expectations of $561.1 million, suggesting the company isn’t getting as much traction from its newer, AI-based software as initially hoped.
Too much uncertainty to own Adobe stock
That it is not an unreasonable concern.
Adobe is practically royalty in the world of enterprise software. It invented the portable document format (PDF) in 1991, and its Photoshop software has long been the workhorse of choice for most digital design, layout, and photography professionals. The introduction of its Experience Cloud platform in 2017 was also revolutionary at the time, allowing users to create unique digital/web experiences for every consumer.
The software and cloud services business has continued to evolve, however, thanks in large part to generative AI. While it would be a mistake to say that Adobe hasn’t evolved as well, the recent evolution of the industry has led to rivals offering new tools that can do many of the things that Adobe’s do.
That doesn’t mean Adobe is no longer competitive. In fact, it’s still quite competitive and the leading name in certain parts of the software arena. Even with its lackluster fourth-quarter guidance, its top line is expected to grow 20% this fiscal year and another 11% next year. Earnings are likely to grow about the same.
Still, Adobe’s generative AI offerings aren’t convincingly dominating their niches to the extent that investors seem to expect. Until the company’s competitive strength on this front can be accurately assessed, owning Adobe stock won’t be easy.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe. The Motley Fool has a disclosure policy.