Adobe results reveal scale of threat from GenAI competition

(Bloomberg) — Adobe Inc. investors are increasingly worried about competition from generative AI. The Photoshop maker’s results will illustrate how it is dealing with the threat.

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Earlier this week, Melius Research downgraded Adobe to buy, citing risks from image and video generators from OpenAI and Alphabet Inc.’s Google. Adobe shares are down more than 20% this year as Wall Street considers its prospects in a world where AI products create text and images based on user requests.

“Companies will pay for software that offers a clear return on investment, but it has become less clear which services will do so if AI platforms can only offer one version of the product as a feature,” said Sean Sun, portfolio manager at Thornburg Investment Management. “Adobe is integrating AI into its own products, but AI images and videos are becoming very good, very fast – and could become a loser as people stop spending on it and switch to AI.”

Shares were little changed on Wednesday.

On the one hand, AI-focused software companies have performed well this year, including Microsoft Corp., Palantir Technologies Inc. and C3.ai Inc. However, there have also been sales from companies such as Salesforce Inc., Workday Inc., MongoDB Inc. and UiPath Inc., which warned of weaker enterprise IT spending, a headwind that could also impact Adobe, according to Bloomberg Intelligence.

Adobe’s latest report presented a weak outlook, highlighting competition concerns. Consensus estimates for the company’s annual net profit have fallen 13% over the past three months, although the revenue view has remained stable.

Since its mid-March report, the company has been working to reassure investors. AI-related product announcements at its annual Summit conference were viewed positively, as was pricing information for its Acrobat AI Assistant services.

While this failed to reverse the stock’s decline, bulls have other positives they can point to. Thursday’s report is expected to show 20% growth in net profit along with nearly 10% growth in revenue, according to data compiled by Bloomberg. Annual revenue is expected to grow at a double-digit pace over the next fiscal years, while free cash flow is expected to grow 13% this year before accelerating to nearly 25% next year.

The story continues

The stock trades at 24 times estimated earnings, a discount to its long-term average, and its recent weakness could mean a low barrier to offsetting the results. More than 75% of analysts monitored by Bloomberg recommend buying the shares, while the average price target points to an increase of 31%.

“There are a lot of software companies that will struggle against AI, but there are also some that are starting to look interesting from a valuation perspective, and where the market may realize that they are not as at risk as they were previously. I thought,” said Brent Fredberg, portfolio manager at Brandes Investment Partners.

“We are focusing on those with a lot of data about their customers, as AI is data-intensive, and who have the balance sheet strength and financial resources to invest in their own AI offerings.”

AI has evolved so quickly that perceived winners and losers can change quickly. Alphabet was considered a competitor for a time, but is now generally seen as a leader.

“We’re still in the early days of AI, so we don’t know what this will mean for software demand or efficiency, especially if some companies can offer almost all services,” said Michael Mullaney, director of global market research at Boston Partners. . “Some will be very vulnerable, but others will really benefit. It feels like the calm before the storm.”

Technical Chart of the Day

soared to a record high on Tuesday, jumping 7.3% in its biggest daily percentage gain since November 2021, as investors bet the company’s newly unveiled AI capabilities would spur an iPhone upgrade cycle. The rally added more than $210 billion to the company’s market capitalization, representing one of the largest single-session market value increases in history, according to data compiled by Bloomberg.

Top Tech News

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• Sapeon Korea Inc., the startup artificial intelligence chip unit of SK Telecom Co., and rival Rebellions Inc. have agreed to combine their businesses, joining forces in a bid to compete globally and capitalize on growing demand for AI services.

• Spotify Technology SA will introduce a new, higher-priced premium plan for its most ardent users later this year, according to a person familiar with the plan. Users will be charged at least $5 more per month for access to better audio and new tools for creating playlists and managing their music libraries, the person said.

• ByteDance Ltd. is cutting about 450 jobs at its Indonesian e-commerce arm in the first round of cuts since it combined its TikTok store with local rival Tokopedia in January.

• will produce a sample of startup Diraq Pty’s chip equipped with quantum and classical processors this month, the latest attempt to make quantum computers practical in the real world.

Profits due on Wednesday

–With assistance from Taryana Odayar.

(Updates for afternoon trading.)

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