Everyone Thinks Adobe Will Suffer from AI. Here's Why It Could Thrive Instead

In a world where anyone can create a brochure, company presentation, or video with brief instructions to an AI tool, where is Adobe (NASDAQ: ADBE) headed?

The $141 billion company -- which offers creative products for photographers, video editors, graphic and experience designers, game developers, content creators, marketers, and more -- is widely seen as being on the wrong side of the AI revolution. Shares are down 26% year to date, even as the S&P 500 index is up 14%.

In September, Morgan Stanley downgraded Adobe, citing doubts that generative AI can grow rather than hurt its business. Wedbush downgraded it to a sell, after questioning its relevance in a market "increasingly shaped by AI tools." And Melius Research downgraded Adobe in August, also citing AI concerns.

But amid the sell-off and the chorus from analysts that Adobe is dangerously behind the times, a funny thing is happening. Three years after ChatGPT ushered in the age of AI, revenue at Adobe is at an all-time high. Earnings per share just rose 14% from a year ago, which is stronger growth than the average S&P 500 company is posting this earnings season. And monthly active users of Adobe's Acrobat and/or Express products are up 25% year over year.

This is a company that's embracing AI, rather than waiting to be disrupted. And there are three reasons why Adobe could come out of the $15.7 trillion AI revolution much stronger than before.

"The biggest opportunity for Adobe in decades"

Adobe CEO Shantanu Narayen brought up the AI revolution almost immediately in the third-quarter earnings presentation. Calling it "the biggest opportunity for Adobe in decades," he listed the ways in which Adobe is hugging the AI revolution tight.

First, the company's flagship Creative Cloud application is being infused with AI capabilities. It includes leading third-party, commercially safe models, and Alphabet's Gemini Flash 2.5, as well as partner models from providers such as OpenAI, Black Forest Labs, Runway, Pika Labs, and Ideogram.

Second, it's worth repeating that these models are commercially safe, which is no small thing for Adobe's corporate subscribers. It may not be a big deal to use AI to create a flyer for your neighborhood barbecue or baby shower. But corporations don't want to be hit over copyright infringement if the AI models they use draw on protected work.

Third, according to Narayen, the company's AI-influenced annual recurring revenue (ARR) is now at $5 billion, which is up from $3.5 billion in 2024 and well above target. As a result, Adobe is raising its fiscal 2025 revenue and earnings-per-share (EPS) targets, to a range of $23.65 billion to $26.70 billion in revenue and EPS of $16.53 to $16.58.

The company is seeing strong levels of adoption and momentum for Adobe Experience Platform (AEP) AI Assistant, with 70% of eligible AEP customers using it. And there's plenty of opportunity for Adobe to grab market share as AI use continues to proliferate. That feeds more material into its AI models, which makes the models better, which leads to more content being created, which feeds into the models, making them better, and leads to ever more content in a virtuous cycle.

Image source: Getty Images.

Or as the president of the company's digital media business, David Wadhwani, put it at an Investor Day presentation: "Every time there's something that comes out in the AI space that improves the model, that increases the amount of content that's going to get created, we're all cheering, whether it comes from Adobe or whether it comes from a third-party model."

That was in October 2024. Given the company's double-digit EPS and revenue growth, with AI-influenced annual recurring revenue climbing even faster, nothing has happened in the last 13 months to cast doubt on his prediction.

Adobe is much more than Creative Cloud

Creative Cloud, the business segment that is supposedly on death watch from the rise of AI, comprises just one of Adobe's three business segments. At $12.68 billion in fiscal 2024, it totaled 59% of the $21.51 billion in revenue that Adobe raked in that fiscal year.

Of course, that means 41% of revenue comes outside of Creative Cloud. Digital Media was 15%, while the Digital Experience segment logged $5.37 billion, or 25% of revenues. None of these segments is showing any sign of weakness. Digital Media just saw 12% revenue growth year-over-year, while Digital Experience saw revues climb 9% year-over-year.

Amid these strong numbers, Adobe is having to work hard to convince the media and investors that its business won't vanish overnight. Last week, it invited 10,000 marketers and creatives to its Investor Day conference to show the world how it's adapting. But for now, markets are pricing the company like it's a risky play.

There is some risk that Adobe doesn't meet this moment, despite the earnings, revenue, and robustly growing AI-related annually recurring revenue numbers suggesting it's off to a strong start. But this risk is already priced into the stock, and then some. Adobe now carries a price-to-earnings ratio of 21, which is well below the S&P 500 average of 32.

Meanwhile, the company continues to buy back shares at a brisk pace. After buying back 17.5 million shares last year, it's now repurchased nearly 9 million shares so far this year. This will help drive earnings-per-share growth, even if Adobe suddenly stops growing revenue.

Analysts may anticipate the company running into an AI wall, but these are the same analysts who have underestimated Adobe's sales growth in each of the last four quarters, by as much as 10.14%. I believe this company will continue to surprise a lot of people on the upside in the years ahead.

William Dahl has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe and Alphabet. The Motley Fool recommends the following options: long January 2028 $330 calls on Adobe and short January 2028 $340 calls on Adobe. The Motley Fool has a disclosure policy.