Shares in digital media technology company Adobe (ADBE -3.26%) declined by 25.5% in 2024, according to data provided by S&P Global Market Intelligence. Frankly, this needs some explaining because it’s not often that a company loses a quarter of its value after handily beating its initial full-year guidance.
Adobe beat expectations in 2024
Let’s start by looking at full-year 2024 performance versus the guidance given at the start of the year. As a reminder, Adobe’s financial year ended on Nov. 29, 2024.
As you can see below, Adobe beat on all its key metrics and, notably, its core digital media net new annualized recurring revenue (ARR). This key metric indicates its future growth in earnings and cash flow.
|
Adobe |
Original Full-Year 2024 Guidance |
Actual Full-Year 2024 |
Result |
|---|---|---|---|
|
Revenue |
$21.3 billion to $21.5 billion |
$21.51 billion |
Beat |
|
Digital media net new annualized recurring revenue |
$1.9 billion |
$2 billion |
Beat |
|
Digital media segment revenue |
$15.75 billion to $15.85 billion |
$15.86 |
Beat |
|
Non-GAAP earnings per share |
$17.60 -$18.00 |
$18.42 |
Beat |
Data source: Company presentations.
The bullish case emphasizes Adobe’s 89% gross profit margins, 36% operating profit margins, and its scalable business model that sees ARR growth drop into cash-flow growth.
Why the market sold off Adobe stock in 2024
Adobe has excellent metrics, and the investment case is powerful based on its existing earnings. However, the reason for the sell-off in 2024 comes down to uncertainty about its future metrics and the role of AI.
For example, a slew of investment analysts (including those at Deutsche Bank, Wells Fargo, Barclays, and UBS) cut their price targets on the stock, some citing the role of Adobe’s AI solution, Firefly, in its earnings.
The glass-half-full approach sees Adobe’s AI tools as a future opportunity for monetization, and management sees it too, although its current approach encourages usage and familiarization of the solutions before stepping up monetization efforts.
Image source: Getty Images.
The glass-half-empty view sees Adobe having difficulties monetizing AI amid fierce competition. Moreover, that competition may lead to a slowdown in growth at Adobe or a challenge to its sky-high margins and customer retention rates. In addition, the development of AI in digital media may lead to layoffs in the creative industries that buy Adobe’s technology.
It’s a debate that’s likely to hang over the stock until Adobe demonstrates monetization of its AI solutions.
Wells Fargo is an advertising partner of Motley Fool Money. Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.
