Despite a Slide in Stock, Adobe's Results Cement Its Ai Laggard Status

Investors who have watched Adobe Inc. trail behind in the artificial intelligence boom aren’t finding much to cheer about ahead of the company’s latest earnings release.

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Wall Street is projecting full-year revenue growth of nearly 10% a respectable pace but still Adobe’s slowest in more than a decade. Analysts also expect growth to decelerate further each year through fiscal 2028. That outlook looks less attractive compared to clear AI beneficiaries such as Oracle Corp., which are forecasting accelerating expansion in the years ahead.

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The biggest challenge for Adobe is the rise of AI tools that threaten its core business of creative software. Some applications now generate images instantly from text prompts, posing a direct challenge to Photoshop and other Adobe staples.

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Although the company has rolled out its own suite of AI-powered products, investors remain unconvinced they are enough to neutralize the long-term threat.

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“AI image generation that replaces stock photography and traditional editing tools is already disrupting the industry,” said Brian Barbetta, co-leader of Wellington Management’s technology team. “AI firms are growing so quickly that it feels like their success is coming directly at the expense of older incumbents.”

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San Jose-based Adobe has become a case study for how legacy software companies can be squeezed by AI-driven innovation. The stock has tumbled more than 20% this year and is down nearly 40% from late 2023.

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Over the same period, an exchange-traded fund tracking software shares has gained more than 40%. This underperformance has pushed Adobe’s valuation to less than 16 times earnings its cheapest level in over 10 years.

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When Adobe reports fiscal third-quarter earnings on Thursday, consensus estimates call for revenue to rise 9.3% and net earnings per share to climb 7%, according to Bloomberg data. Still, investor skepticism lingers. Adobe’s last four earnings announcements all triggered selloffs, with its most recent guidance amplifying AI-related concerns.

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“Adobe faces some of the most existential risk from AI of any major software company,” said Adam Crisafulli, founder of Vital Knowledge. He added that the results from other industry peers haven’t done much to calm those fears.

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Recent disappointments across the sector have also weighed on sentiment. Design software firm Figma, which Adobe attempted but failed to acquire, issued a weak outlook last week, sending shares lower. Similarly, Salesforce Inc. another long-established software name battling AI disruption delivered an uninspiring report that reinforced investor caution.

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“The idea that Adobe is finished is probably overblown, but the company has a lot to prove,” said David Wagner, portfolio manager at Aptus Capital Advisors. “It needs to demonstrate consistent innovation and growth, not just in this quarter but over several years, to show it can keep pace. That’s a tough challenge.”

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Despite the cloud of uncertainty, sentiment isn’t entirely bearish. More than two-thirds of analysts tracked by Bloomberg rate Adobe a “buy” a stronger endorsement than Apple Inc. Adobe’s shares also trade more than 35% below the average analyst price target, ranking it among the top three implied return opportunities in the S&P 500 technology sector.

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Still, Wellington’s Barbetta cautioned that investors chasing cheap valuations could be setting themselves up for disappointment. “When disruption risk is real, forward estimates are often wrong,” he warned. “What looks cheap today can turn out to be expensive if a company struggles to stay competitive. With AI threatening license growth and pricing power, it may be difficult for Adobe to reignite momentum.”

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Others, however, see potential for Adobe to adapt. Morgan Stanley’s Keith Weiss pointed to Snowflake Inc. as an example. Once viewed as vulnerable to AI disruption, Snowflake has recently reassured investors with steady core growth and effective integration of generative AI features. Weiss suggested Adobe could follow a similar path, writing in a recent note that it’s “worth sharpening pencils” on incumbents with the innovation pace to evolve.

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That view resonates with some investors who see opportunity in Adobe’s beaten-down valuation. Conrad van Tienhoven, portfolio manager at Riverpark Capital, continues to hold a smaller stake after previously owning a larger position.

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“Adobe still offers solid growth, strong margins, and now trades at a deep discount,” he said. “The market has already labeled it a loser, and that creates opportunity. If Adobe executes on AI, this valuation could prove a springboard for significant upside.”

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The broader contrast in investor sentiment is underscored by Oracle’s recent surge. Shares of Oracle jumped 36% in a single session, adding roughly $250 billion in market value a record increase in dollar terms, even if not by percentage gain.

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While its biggest rallies came decades ago when the company was much smaller, the move highlights how investors are rewarding companies viewed as clear AI winners, in stark contrast to Adobe’s current struggles.

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