Adobe's Earnings Justify Its AI-Driven Boom, But Its Stock Will Now Take A Breathe?

Adobe Inc. experienced a significant surge in its share price, with a 42% monthly rally leading up to its earnings report. Wall Street recognized Adobe as an attractive player in the artificial intelligence (AI) space, and the company's latest financial results only served to validate this perception.

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Adobe raised its expectations for fiscal 2023, including key metrics such as annual recurring revenue. This upward revision demonstrated "confidence not only within the quarter but also for the upcoming quarters," as noted by Bernstein analyst Mark Moerdler.

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Amid a mixed performance in the software industry's earnings, Adobe's results and commentary stood out, according to Moerdler. He emphasized the company's ability to raise its FY23 targets in a challenging macro environment, which reflects the strength of its business.

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Moerdler expressed his belief that Adobe will effectively monetize AI through multiple avenues, while continuing to drive margin improvement despite aggressive investments in technology. He praised Adobe's strategic investments in AI over the years and highlighted the company's advantageous position in the AI space. As a result, he raised his price target on the shares to $585 from $431 and reiterated an outperform rating.

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In premarket trading, Adobe shares were up over 4% on Friday.

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Derrick Wood of TD Cowen observed a significant shift in investor sentiment towards Adobe. He noted that the perception of AI as a headwind has transformed into a compelling tailwind for Adobe, with the company's Q2 results and guidance reinforcing this positive sentiment. Wood expects generative AI to substantially enhance Adobe's total addressable market and believes the company is well-prepared to capitalize on this opportunity, projecting substantial growth starting next year. Wood upgraded his price target to $575 from $500 and maintained an outperform rating.

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Analysts offered differing views on whether Adobe shares can sustain their recent momentum. Kirk Materne of Evercore ISI acknowledged the possibility of a pause in the stock's current levels, considering its 40% increase in the past month. However, Materne believed Adobe's strong positioning to monetize generative AI across both consumer and enterprise customer bases would continue to drive positive estimates heading into 2024. He upgraded his price target to $590 from $475 and maintained an outperform rating.

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Sterling Auty of SVB MoffettNathanson recognized Adobe's accomplishments but remained neutral on the stock, as revenue impacts from AI were expected in the fourth quarter of 2023. Auty pointed out competitive threats from other AI companies but acknowledged Adobe's successful rollout of AI functionality. He raised his price target to $540 from $360 while maintaining a market perform rating.

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Gregg Moskowitz of Mizuho expressed a balanced perspective. He recognized Adobe's improved fundamentals and the potential upside of GenAI in the medium to long term. However, he cautioned that the valuation is no longer cheap and regulatory concerns surround the pending acquisition of Figma. Moskowitz maintained a neutral rating but raised his price target to $520 from $450.

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