Adobe shares surge after earnings beat expectations, but how much will artificial intelligence weigh on software companies? We discussed how we continue to embrace Adobe products and commented on Microsoft’s all-time high closing stock price.
video transcript
Brad Smith: Adobe said in its latest earnings call that it significantly outperformed revenue and bottom line, while also raising its revenue forecast. The Adobe CEO also noted the company’s position to lead the new era of generative AI. To learn more about Adobe’s performance, we speak to Jefferies Senior Analyst Brent Thill.
Hi Brent. I’m glad to meet you. If you look at the results of some numbers here and how they guide you and what they say about that guide, at the end of the day we are all generated I was hitting hotkeys for AI. Be real. So, do they have what it takes to captivate the market and attract investors to their commitment to generative AI?
Brent Hill: yes. The jury is still out on AI. I think a lot of people on Wall Street think Adobe is going to take a hit on user numbers. How many Adobe seats would you need if you could reduce the number of creative users building something? So it’s a long-term debate. In the short term, it definitely scared off grizzly bears. I think this is a great print, beat and raise. Concerns persist that the creative business is in decline. The greatest achievements within the business are outside the creative business. And I think it’s completely exaggerated to say Adobe died because of AI.
So, we think Adobe has been showing off AI for years. Investors don’t seem to be listening to them. So every bear in the camp seems like the AI is going to smash them. and we haven’t seen it. Long term, I think the debate is still going on. Of course, you have to sign a contract with Figma. They overspent his $20 billion, but when this is done, it will definitely help their creative process.
And once you get past that, all eyes will be on Canva. Canva, as you know, is a threat on the low end of the market. But like we said, great stocks have big controversies. And there was a big controversy about Adobe. we are very bullish. And ultimately, I think the good news is that creators aren’t running away from Adobe when it comes to working and talking to users. They accept Adobe. Yes, they’re going to use companies like Midjourney, great AI tools to aid in the creative process. But at this point, I can’t afford not to use Adobe.
So at this point, we still think this story has legs. The stock is up more than 45% year-to-date. Given its size and recent pullback, that’s our only concern. But yes, grizzly bears here fear being kicked out of camp in the short term.
Diane King Hall: That means the price target is over $500 per share, but the exact number is lost. $530 per share. It’s far from there. With today’s results, or results announced today, do you think you can reach your goals?
Brent Hill: yes. I mean, it’s not far. I mean, it’s not that far. Overtime it’s over 500. So I think it’s totally fine. We’ve been bullish on Adobe since its stock price was $30.
Diane King Hall: Oh wow.
Brent Hill: Therefore, we continue to believe that there has been a lot of controversy about AI in the short term. And that was the big overhang. There was the same controversy when Steve Jobs was alive, Flash bashing Adobe Flash for being dead. And we thought Adobe was done. It didn’t, and had 30 in stock.
So this company has incredible resilience and incredible leadership. Few companies achieve double-digit revenue growth, generate 45% profit margins, and have a management team of this quality. You know, I’ve always said that this company has an incredible team. And users love their products. And most of the users we spoke to, he pays ten times as much for the product.
In terms of sentiment around names, I don’t follow many of those environmental narratives. Big kudos to them for what they’re doing and what they’ve been doing. Again, I love this controversy. Because I think we’ve proven that AI won’t push them off the road.
Diane King Hall: What would you like to hear from management today?
Brent Hill: I think everyone worries about the economy, but in the end will there be a financial bogeyman who will jump out of the bush and scare everyone? And you know, it’s been a concern for engineers from the beginning. And the economists were right when they said things were slowing down. But I think Wall Street was wrong about things falling off a cliff. They didn’t fall off a cliff.
As you know, Adobe’s business was even stronger in the second quarter than it was last quarter. So overall the second half of the year wasn’t that great for the digital experience business. Therefore, we focus on that point from the guide’s point of view. But I think the overall tone of the business overall and AI next are his two big points that we’re looking at.
Brad Smith: Brent, I want to switch gears here. Of course, we continue to monitor Microsoft’s closing price. Microsoft’s all-time closing high was up just over 3% during today’s trading activity. And it has maintained an increase of about 45% throughout the year.
It was one of the giants that first generated a lot of fanfare with its investment in OpenAI and also launched this FOMO trade within generative AI. Where do you think stocks go from here? So while FOMO trading continues to be a mess, is this just a predictable and ongoing trend in the short term?
Brent Hill: Stock prices are rising. It will be $400. We have been very bullish about this name for a long time. And at this point, we’re in front of Amazon and even Google. And we think they’re leading the way. Remember, they lost the cloud war. they were second. they were number one. CEO Nadella says, “We’re not going to be number two.” we’re going out there Let’s go to the field first. And show everyone where we are.
So they do an amazing job of controlling the narrative that comes to the fore. Just a few weeks ago, their executives attended our software conference. In short, executives are falling out of their chairs in terms of ROI, pricing, and customer excitement. Again, this is a gradual launch of AI. Not everything is headed for summer. It will be implemented in phases from the end of the year to the beginning of 2024.
But again, I think Microsoft is in the same class when it comes to the quality of Adobe’s management, the quality of its finances, its products, its innovation. With AI, they can be ahead of their class. And now, as we all know, Amazon got his public cloud first way with AWS, an $85 billion run rate. We believe Microsoft, or Microsoft, will lead the next generation of this cloud war.
And we all counted them here. And I think they are on their way home. That’s pretty much what Rickie Fowler did at the US Open today. Everyone thought Rickie Fowler couldn’t shoot well. And then the guy went out and scored a minus eight. I mean, incredible, incredible recovery.
And, voila, thanks to Nadella. In short, he is the greatest leader in technology. After all, we think he does a phenomenal job. Again, I think the Microsoft-AI story is just beginning. And again, the biggest concern at the moment, as I’ve said before, is that everyone is on board with these names right now, and it’s a highly anticipated game. And the stock price fluctuated. Ultimately, though, we believe there is still a really good runway down to $400.
Brad Smith: I mean, even Fowler still has Scotty Scheffler not too far away. Brent, I was hoping you could give me an update on something I haven’t seen, at least–
Brent Hill: I’m sorry if I gave you away. I’m sorry if I gave you away.
Brad Smith: that’s ok. I couldn’t watch it in full screen at my desk today. I had to do some work. But, Mr. Brent, thank you very much for your update and your valuable time on sportsballs. Brent, I would like to contact you again about Microsoft and technology in general. thanks so much.
