ADBE's AI Push Gains Traction: Buy or Hold the Stock Post Q3 Earnings?

Adobe’s ADBE strategy of infusing AI into its portfolio is driving growth as reflected by the recently reported third-quarter fiscal 2025 results. Adobe AI influenced annual recurring revenues (ARR), which surpassed $5 billion, and management expects it to continue to rise as a percentage of Adobe’s business. ARR from new AI-first products, including Firefly, Acrobat AI Assistant and GenStudio for performance marketing, hit Adobe’s end-of-year target of more than $250 million. Does this AI traction make the ADBE stock a Buy right now? Let’s find out.Adobe’s AI Push Aiding Top-Line GrowthAdobe’s third-quarter fiscal 2025 Digital Media ARR increased 11.7% year over year at constant currency, driven by strong demand for AI-powered Creative Cloud Pro and Acrobat, as well as AI-first products, Firefly and Acrobat AI Assistant. The monthly active users of Acrobat and Express grew approximately 25% year over year within the Business Professionals and Consumers segment. Adobe has been successfully monetizing Acrobat offerings, including the AI assistant and the recently launched Acrobat Studio. Creative Professionals business benefited from increasing demand and usage of AI in Photoshop, Premiere Pro and Illustrator as part of the new Creative Cloud Pro offering. The addition of Firefly and third-party models in Creative Cloud Applications drove generative AI (Gen AI) usage sequentially. Marketing professionals’ business benefited from the strong demand for Adobe Experience Platform (AEP) and native applications. ARR grew more than 40% year over year as enterprises focus on delivering personalization at scale for customer engagement.Workfront, Frame, AEM Assets, Firefly Services and GenStudio for performance marketing products, which comprises the integrated GenStudio solution, now exceed $1 billion in ARR and are growing more than 25% year over year. One Adobe deal saw 60% year-over-year growth, reflecting an improving footprint among enterprises.Adobe Raises FY26 Guidance on AI PushAdobe now expects fiscal 2025 revenues between $23.65 billion and $23.7 billion ($21.51 billion in fiscal 2024), up from the previous guidance range of $23.5-$23.6 billion. Fiscal 2025 non-GAAP earnings are now expected between $20.80 per share and $20.85 per share ($18.42 per share in fiscal 2024), higher than the previous guidance of $20.50-$20.70 per share. For fiscal 2025, the Zacks Consensus Estimate for revenues is currently pegged at $23.56 billion, suggesting 9.56% growth from 2024’s reported figure. The Zacks Consensus Estimate for earnings is pegged at $20.65 per share, up a couple of cents per share over the past 30 days. The figure indicates 12.1% growth from fiscal 2024’s reported figure. Adobe Inc. Price and Consensus Adobe Inc. price-consensus-chart | Adobe Inc. Quote Adobe Shares Lag Industry, SectorAdobe shares have declined 21.5% year to date (YTD), underperforming the Zacks Computer and Technology sector’s return of 18.8% and the Zacks Computer – Software industry’s appreciation of 18.7%. The underperformance reflects stiff competition in the AI and Gen AI space from the likes of Microsoft MSFT-backed OpenAI, Alphabet GOOGL, Salesforce CRM, Midjourney, Canva and others. Adobe’s AI business is minuscule compared with the likes of Microsoft, Alphabet, and Salesforce. Microsoft’s Intelligent Cloud revenues are benefiting from growth in Azure AI services and a rise in the AI Copilot business. Alphabet’s focus on infusing AI heavily across its offerings, including Search and Google Cloud, has been a major growth driver. Salesforce’s strategy of continuous expansion of Gen AI offerings is helping it tap growth opportunities.In terms of revenue, Microsoft and Alphabet reported 18.1% and 13.8% year-over-year growth in their fourth-quarter fiscal 2025 and second-quarter 2025, respectively. The figures are better than Adobe’s 10.7% revenue growth in the recently concluded quarter. Microsoft and Alphabet’s net Income margin expanded 160 basis points (bps) and 140 bps, respectively, against Adobe’s contraction of 150 bps, reflecting the fact that Adobe faced hardship in converting revenues to profit.  Adobe has underperformed Microsoft and Alphabet YTD, but outperformed Salesforce. While shares of Microsoft and Alphabet have returned 21% and 27.2%, respectively, Salesforce has declined 27.4%.ADBE Stock’s YTD Performance Image Source: Zacks Investment Research Adobe Shares Are OvervaluedAdobe has a Value Score of C, which suggests a stretched valuation.In terms of Price/Book, Adobe is trading at 12.59X higher than the broader sector’s 10.81X, Microsoft’s 11.04X, Alphabet’s 8.03X and Salesforce’s 3.77X.ADBE’s Valuation Image Source: Zacks Investment Research Adobe shares are now trading below the 50-day and 200-day moving averages, indicating a bearish trend.ADBE Trades Below the 50-Day and 200-Day SMAs Image Source: Zacks Investment Research ConclusionAdobe’s focus on improving monetization of its AI-powered solutions is a positive for investors already holding the stock. However, a stretched valuation, macroeconomic challenges, and stiff competition make the stock a risky bet right now. ADBE currently has a Zacks Rank #3 (Hold), which implies that investors should wait for a more favorable point to accumulate the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.One Big Gain, Every Trading DayTo help you take full advantage of this market, you’re invited to access every stock recommendation in all our private portfolios - for just $1.Zacks private portfolio services that closed 256 double and triple-digit winners in 2024 alone. That’s about one big gain every day the market was open. 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