ADBE - Adobe: The Early Stage Of GenAI Monetization (Rating Downgrade)

2024-06-16 19:00:00 ET

Summary

• Adobe's stock rallied 15% after 2Q FY2024 earnings, but revenue outlook is below market consensus, showing weak growth rebound.
• Despite strong growth in RPO, company's AI monetization plan has not significantly boosted top-line growth and billings, with guided 9.5% YoY revenue growth in 3Q FY2024.
• The company's FCF growth has been disappointing, marked by a downward trend in FCF margins.
• Firefly can be customized by developers to create thousands of asset variations quickly, which could significantly accelerate AI monetization by boosting content creation efficiency.
• The stock is trading at a premium valuation, with 1.04x of EV/Revenue/g FY2024E exceeding the averages across all software categories.

Investment Thesis

Adobe (NASDAQ: ADBE )'s stock rallied more than 15% after its Q2 FY2024 earnings, driven by depressed market sentiment and better-than-expected earnings results. Despite an optimistic tone from the street regarding this quarter, my view is more muted for two reasons. First, the company's revenue outlook is not only below market consensus but also does not indicate a strong growth rebound. Second, its top-line growth is expected to be 10.5% YoY in FY2024, which does not support its premium valuation as an AI-driven growth stock....

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