Adobe earnings help justify AI-fueled surge, but will the stock now 'take a breather'?
7:56 am ET June 16, 2023 (MarketWatch)
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By Emily Bary
Analysts cheer AI opportunities but remain divided on upside potential after a sizable recent run up
Adobe Inc. shares had seen a 42% monthly rally in the lead up to its earnings as Wall Street deemed the company an attractive artificial-intelligence play, and the software giant's latest report helped validate that surge.
The company hiked its expectations for fiscal 2023, including on the closely watched metric of annual recurring revenue. This boost signaled "confidence not only within the quarter but also for the upcoming quarters," according to Bernstein analyst Mark Moerdler.
Amid a mixed stretch for software earnings, Adobe's (ADBE)results and commentary stood out, Moerdler commented. "We like the fact that the company raised their FY23 targets in the face of difficult macro environment, an important sign of the strength in the business."
He wrote that he expects Adobe to monetize AI "in numerous ways" and thinks the company will be able to drive margin improvement even while making further aggressive investments in the technology.
"Adobe (like Microsoft) is a company that has invested thoughtfully over many years in AI and is well-positioned in the space now," Moerdler wrote, as he lifted his price target on the shares to $585 from $431 and reiterated an outperform rating.
Shares of Adobe were ahead more than 4% in Friday's premarket action.
Derrick Wood of TD Cowen highlighted that the tone on Adobe has shifted in a big way lately.
"In a matter of weeks, investor sentiment has shifted from GenAI being a headwind to compelling tailwind for ADBE, and 2Q results/guide reinforce the latter stance," he wrote. He thinks generative AI can drive a significant boost to Adobe's total addressable market and that the company is "well-positioned to capitalize on this opportunity, with a meaningful build in growth levers starting next year."
He rated the stock at outperform while upping his price target to $575 from $500 after earnings.
See also: Adobe enters AI fray with Firefly
Analysts chimed in with various views on whether Adobe shares will be able to sustain their recent momentum.
"With the stock up 40% over the past month, we would not be surprised to see the shares take a breather at current levels," wrote Evercore ISI's Kirk Materne, who rated the stock at outperform and boosted his price target to $590 from $475 late Thursday. "However, when zooming out and taking a 6-12 month view, we continue to believe Adobe is incredibly well positioned to monetize Gen AI [generative AI] across both its consumer and enterprise customer base and this should keep a positive bias on our/Street estimates" heading into 2024.
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Sterling Auty of SVB MoffettNathanson wrote that he and his team "have to give credit where credit is due," though they stayed on the sidelines on Adobe shares and noted that revenue impacts from AI won't really hit until the fourth quarter of 2023.
"There are still questions about competitive threats from Midjourney (Private), Dalle (OpenAI), and others," Auty wrote. "But Adobe has done a very good job rolling out a lot of functionality in a short period of time and initial reactions have been positive. Our expectation is that this will be incremental to growth, but the question is how much."
He brought his price target up to $540 from $360 in his most recent report, while keeping a market perform rating.
Read: AI is ready to take on menial tasks in the workplace, but don't sweat robot replacement (just yet)
Gregg Moskowitz of Mizuho had a similarly balanced view.
Adobe's "fundamentals appear to be on firmer ground, and GenAI offers legitimate upside potential over the medium-term and beyond," he wrote. "That said, the multiple is no longer inexpensive, and much uncertainty remains with respect to Figma," a pending acquisition that has sparked regulatory pushback.
Moskowitz had a neutral rating on the stock, though he raised his price target to $520 from $450 Friday.
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-Emily Bary
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June 16, 2023 07:56 ET (11:56 GMT)
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