Analysis: Adobe's Mixed Q1 Earnings and Disappointing Q2 Guidance

Why Adobe Stock Was Sliding Today

The software powerhouse offered weaker-than-expected guidance for its current quarter. Shares of Adobe (NASDAQ: ADBE) were falling Friday after the cloud software giant beat estimates for its fiscal first quarter, but issued disappointing guidance for the current quarter, sparking concerns that competition was catching up to it and it was failing to fully capitalize on opportunities of artificial intelligence (AI).

As of 2:15 p.m. ET, the stock was down by 14.1%.

Adobe's steady growth isn't good enough

Adobe reported 11% revenue growth to $5.18 billion, which was slightly ahead of estimates at $5.14 billion.

• Revenue from the digital media segment rose 12% to $3.82 billion, which included 11% growth in creative revenue to $3.07 billion.
• Revenue from the digital experience segment rose 10% to $1.29 billion.

Remaining performance obligations, a proxy for backlog, rose 16% to $17.58 billion, showing a healthy growth in demand.

On the bottom line, adjusted earnings per share rose from $3.80 to $4.48, topping the consensus estimate of $4.38. That didn't include a $1 billion charge related to its decision to abandon its effort to acquire Figma after the deal faced regulatory pushback.

CEO Shantanu Narayen noted that the company had booked record revenue in the quarter, and said, 'We've done an incredible job harnessing the power of generative AI to deliver groundbreaking innovation across our product portfolio.'

Adobe's guidance disappoints

Despite the solid first-quarter results, guidance for the second quarter missed the mark. Management forecast revenue of $5.25 billion to $5.3 billion, which was short of the consensus expectation of $5.31 billion and would reflect a modest slowdown in revenue growth to 9% to 10%.

Adobe shares are priced at a premium, trading at a price-to-earnings ratio of 30, and jitters about growth tend to lead to sell-offs in such situations. Pressure on the Photoshop maker is likely to remain until it can demonstrate it's experiencing clear tailwinds from AI.