Adobe Drops on Weak Forecast Fueled by AI Competition Fears

(Bloomberg) — Adobe Inc. dropped about 10% in extended trading after giving a weak outlook for sales in the current quarter, fueling concerns that new AI-focused startups pose a competitive threat.

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Revenue will be $5.25 billion to $5.3 billion in the period, the company said Thursday in a statement. Analysts, on average, projected $5.31 billion, according to data compiled by Bloomberg. Profit, excluding some items, will be as much as $4.40 a share, compared with analysts’ average estimate of $4.38.

The longtime leader in software for creative arts professionals has faced anxieties that new generative AI-based startups will cut into its market. Adobe has responded by putting its proprietary AI model, Firefly, into its top products such as Photoshop and Illustrator. Still, a recent demonstration by OpenAI of its video-generation model, Sora, reignited investors’ concerns about competition.

“Expectations were perhaps a little higher in terms of what we would guide,” Chief Executive Officer Shantanu Narayen said during a conference call after the results. “But you know I’m really optimistic about what we’ve done,” he said of the company’s AI initiatives.

Read More: Inside Adobe’s Very Cautious Gambit to Inject AI Into Everything

Adobe expects $440 million in new recurring creative business in the current quarter, below the $459 million expected by analysts. That likely disappointed investors who want to see greater financial impact from the new AI features, said Parker Lane, an analyst at Stifel, in an interview on Bloomberg TV. “Investors are hearing a lot of great things from the company on the AI front, like increased adoption, and are simply waiting for that to reflect itself in the fundamentals.”

The shares hit a low of $503.80 in extended trading after closing at $570.45 in New York. After jumping 77% in 2023, the stock has dipped 4.4% since the start of the year. This underperformance is due to fears about competition both from generative startups like OpenAI and longer-standing rivals like Canva Inc., wrote Keith Weiss, an analyst at Morgan Stanley, ahead of the results.

In the fiscal first quarter, sales increased 11% to $5.18 billion. Profit, excluding some items, was $4.48 a share. Wall Street expected revenue of $5.14 billion and adjusted earnings of $4.38 a share.

The digital media unit, which includes Adobe’s flagship creative and document-processing software, posted sales that gained 12% to $3.82 billion in the period ended March 1. Revenue from the division that includes marketing and analytics software rose 10% to $1.29 billion.

The company is already beginning to monetize the new AI features and will increase these efforts in the second half of the year, executives said in a conference call after the results. Firefly has been used to generate over 6.5 billion pieces of media, Executive Vice President David Wadhwani said.

New innovations in video-generating AI should accelerate demand for Adobe’s existing editing tools, as creators will need to work with the videos, Narayen said. “This notion that the next Oppenheimer will be done using a text-to-video prompt — it’s not going to happen for decades,” he added.

Wadhwani said Adobe would showcase more video features in the coming months.

The company announced a new $25 billion share buyback program. Adobe’s previous stock repurchase plan for $15 billion was scheduled to expire at the end of fiscal 2024.

In December, Adobe said it was abandoning its planned merger with product design startup Figma Inc. in response to regulatory pressure, which freed up billions in cash. It’s also ending its effort to create a product internally to rival Figma, and instead may explore the product category through partnerships.

(Updates with comments from CEO in the fourth paragraph.)

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