Is Adobe (ADBE.US) able to shake off the "AI laggard" label with a strong Q3 financial report despite a slowdown in growth and a slump in stock prices?

For investors who have witnessed Adobe's stock price falling behind in the AI frenzy, the latest quarterly financial report from the software giant may still struggle to inject confidence into the market. On Wall Street, it is expected that Adobe's annual revenue growth rate will be close to 10% - a stable performance, but the lowest level in over a decade for the company. Analysts predict that this growth fatigue will continue into the 2028 fiscal year; meanwhile, companies like Oracle Corporation, which are expected to achieve accelerated growth in the coming years in the AI field, are becoming the preferred options for investors. The core challenge facing Adobe is that the proliferation of AI applications worldwide is threatening its core software business aimed at creative professionals. For example, some AI tools can generate images almost instantly based on user instructions. Although Adobe has also launched its own suite of AI products, investors believe these products are not sufficient to resist the long-term market threat. "AI image generation technology is replacing stock photography and image editing software, the most obvious industry disruption we have observed so far," said Brian Barbetta, co-head of the technology team at Wellington Management and co-portfolio manager of the Global Innovation Strategy. "The growth rate of AI companies is so rapid, clearly at the expense of traditional legacy companies." The San Jose-based company has become a typical representative of "traditional software companies facing AI disruption risks." The company's stock price has fallen by over 20% this year, more than double that figure since the end of 2023; meanwhile, during the same period, ETF tracking software stocks has risen by over 40%. The continuous decline in stock price has led to Adobe's current P/E ratio of less than 16 times, approaching its lowest valuation level in over a decade. Analyst expectations show that Adobe is expected to report 9.3% revenue growth and 7% earnings per share growth in the third quarter of the 2024 fiscal year, to be released after hours on Thursday. Investors have every reason to be cautious about Adobe, as the stock has fallen after the past four financial reports, and the latest performance guidance has exacerbated market concerns about its AI business. Last week, Adam Crisafulli, founder of market research firm Vital Knowledge, wrote that among all large software companies, Adobe is facing the most severe risk of AI survival, and the financial performance of its peers has not eased this concern. Last week, the stock price of the design software company Figma plummeted due to weaker-than-expected performance guidance, which led to a drop in its stock price; Salesforce, Inc., another traditional software company facing AI disruption risks, also reported below-expected earnings. These cases indicate that even with low valuations and AI strategies, it is still difficult for these companies to make progress. "While calling Adobe 'declining' may be excessive, it is up to the company itself to prove its value," said David Wagner, investment manager at Aptus Capital Advisors. "Adobe needs to demonstrate competitiveness and innovation, and the only way to do this is through sustained growth - not only this quarter, but also in the coming years. However, it is difficult to see how the company can achieve this goal." However, market sentiment towards Adobe is not entirely pessimistic. Among Wall Street analysts, more than two-thirds still recommend "buying" the stock, a proportion higher than that of Apple Inc. Currently, Adobe's stock price is more than 35% below the average analyst target price, ranking third in implied returns among the S&P 500 technology sector components. But Barbetta of Wellington warned that if investors see the low valuations of these companies as a "bottom fishing opportunity," they may suffer losses. "If a company is indeed at risk of disruption, its future performance expectations are often distorted - this means that companies that appear 'cheap' may actually be very expensive because they cannot maintain their technological leadership," he explained. Competition in the AI field may squeeze Adobe's license fees and pricing space, affecting its profit margins and making it difficult to achieve growth acceleration again. Other analysts are confident in Adobe's successful transition to the AI era. Analyst Keith Weiss of Morgan Stanley suggested that Snowflake may be a viable reference - the recent financial report from the company successfully alleviated market concerns about its AI risk. "Instead of searching for the next 'generative AI winner' in software companies, it is better to focus on traditional enterprises that have the potential to become the 'next Snowflake': they can maintain the stability of their core business and expand development opportunities at a sufficient pace of innovation by improving generative AI capabilities on their platforms," Weiss wrote in a report on September 2. "From this perspective, Adobe deserves a serious reevaluation from us." Conrad van Tienhoven, portfolio manager at Riverpark Capital, also agrees with this view. Although Adobe was once one of his top holdings, now he only holds a small amount of the company's stock, but he still chooses to continue holding it. "Adobe can still achieve good growth, with an impressive profit margin performance, and currently has a very attractive valuation," he said. "Although there are concerns about its future in the market, it is already seen as a loser - and that is where the opportunity lies. If Adobe can make a comeback in the AI field, at the current valuation, it has the potential for huge success."