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Adobe Results to Reveal Scale of Threat From GenAI Competition

(Bloomberg) -- Investors in Adobe Inc. are increasingly on edge about competition from generative AI. The Photoshop maker’s results will illustrate how it’s coping with the threat.

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Earlier this week, Melius Research downgraded Adobe to hold from buy, citing risks from image and video generators from OpenAI and Alphabet Inc.’s Google. Adobe shares are down more than 20% this year as Wall Street considers its prospects in a world where AI products create text and images out of user prompts.

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“Companies will pay for software that offers a clear return on investment, but it’s become less clear which services do if AI platforms can just offer a version of the product as a feature,” said Sean Sun, portfolio manager at Thornburg Investment Management. “Adobe is integrating AI into its own products, but AI images and video are becoming really good, really fast — and it could become a loser to the extent people stop spending on it and use AI instead.”

Shares were little changed on Wednesday.

On one hand, software companies focused on AI have performed well this year, including Microsoft Corp., Palantir Technologies Inc., and C3.ai Inc. However, there have also been selloffs from the likes of Salesforce Inc., Workday Inc., MongoDB Inc., and UiPath Inc., which warned about weaker enterprise IT spending, a headwind that could also impact Adobe, according to Bloomberg Intelligence.

Adobe’s last report featured a weak outlook, underlining concerns about competition. Consensus estimates for the company’s net full-year earnings are down 13% over the past three months, though the view for revenue has held steady.

Since its mid-March report, the firm has worked to reassure investors. AI-related product announcements at its annual Summit conference were viewed positively, as was pricing information for its Acrobat AI Assistant services.

While that has failed to reverse the stock’s drop, bulls have other positives they can point to. Thursday’s report is expected to show 20% growth in net earnings, along with nearly 10% revenue growth, according to data compiled by Bloomberg. Full-year revenue is seen growing at a double-digit pace for the next few fiscal years, while free cash flow is expected to grow 13% this year before accelerating to nearly 25% next year.

The stock trades at 24 times estimated earnings, a discount to its long-term average, and its recent weakness could mean a low bar to clear in the results. More than 75% of the analysts tracked by Bloomberg recommend buying the stock, while the average price target points to upside of 31%.

“There are a lot of software companies that will struggle against AI, but there are also ones that are starting to look interesting from a valuation standpoint, and where the market may come around to appreciate that they’re not as much at risk as previously thought,” said Brent Fredberg, a portfolio manager at Brandes Investment Partners.

“We’re focusing on the ones with a lot of data about their customers, since AI is dramatically data-intensive, and which have the balance-sheet strength and financial wherewithal to invest in their own AI offerings.”

AI has evolved so quickly that perceived winners and losers can change rapidly. Alphabet was thought to be an also-ran for a while, but now it is generally seen as a leader.

“We’re still at the start of AI, so we don’t know what it will mean for software demand or efficiency, especially if some companies can offer almost every service,” said Michael Mullaney, director of global market research at Boston Partners. “Some are going to be very vulnerable, but others are going to really benefit. This feels like the calm before the storm.”

Tech Chart of the Day

Apple Inc. soared to a record on Tuesday, jumping 7.3% in its biggest one-day percentage gain since November 2022 as investors bet that the company’s newly unveiled AI features would spur an iPhone upgrade cycle. The rally added more than $210 billion to the company’s market capitalization, making for one of the biggest single-session increases in market value in history, according to data compiled by Bloomberg.

Top Tech News

  • Oracle Corp. reported better-than-expected bookings and announced partnership deals with tech rivals, giving a boost to Chairman Larry Ellison’s effort to redefine the software maker as a major competitor in the business of cloud computing.

  • SK Telecom Co.’s artificial-intelligence chip startup unit Sapeon Korea Inc. and rival Rebellions Inc. have agreed to combine their businesses, joining forces in a bid to compete globally and capitalize on booming demand for AI services.

  • Spotify Technology SA will introduce a new, higher-priced premium plan for its most ardent users later this year, according to a person familiar with the plan. Users will be charged at least $5 more per month for access to better audio and new tools for creating playlists and managing their song libraries, said the person.

  • ByteDance Ltd. is slashing about 450 jobs at its Indonesian e-commerce arm in the first round of cuts since combining its TikTok Shop with local rival Tokopedia in January.

  • GlobalFoundries Inc. will produce a sample of startup Diraq Pty’s chip equipped with both quantum and classical processors this month, the latest attempt to make quantum computers practical in the real world.

Earnings Due Wednesday

  • Postmarket

    • Broadcom

--With assistance from Taryana Odayar.

(Updates to afternoon trading.)

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