Key points in this equity note:
- Adobe beats expectations in Q2 and revises out its fiscal year outlook driven by robust growth and gains from effective cost cutting. Shares are up 2% in extended trading.
- While Adobe management sounds very optimistic on the new generative AI features the outlook is at this time reflecting a muted impact from AI on the company’s growth.
- Google Trends data suggests that search interest in the keywords ‘AI’ and ‘ChatGPT’ is declining from their April highs.
Adobe raises outlook on generative AI features
Nvidia’s crazy revenue outlook back in late May accelerated the AI-hyped rally in US technology stocks and ever since the question has been whether we would signs of higher demand in applications incorporating AI technology. Adobe earnings last night was the first test of that.
The company reported revenue of $4.82bn and adjusted EPS of $3.91 beating estimates, but more importantly Adobe is raising its fiscal year earnings per share outlook to $15.65-15.75 from previously $15.30-15.60 reflecting expected gains from their cost reduction initiatives and slightly higher than previously expected revenue figures driven by an anticipation of higher demand for its products due to the newly introduced generative AI features. Investors were pleased with the results and outlook sending the shares 2% higher in extended trading.
While the response to Adobe earnings has been positive it worth noting that implementing AI features have not yet moved the needle on the outlook for Adobe. This upward revision is very small, so Adobe has yet to see the same bonanza in demand as Nvidia is seeing. The next earnings release will be a bigger test of whether the new AI features are increasing consumption of Adobe software and whether it is pulling new business because the content creation and modification become easier with prompting.