Adobe stock (NASDAQ:ADBE) had a fantastic 2023, with shares gaining approximately 72% last year. Despite such a vigorous performance, I believe Adobe remains a top pick for 2024, with shares poised for further upside. Not only does the company continue to monopolize the creative software space, but it’s also at the forefront of AI innovation. The latter is likely to create a new growth tailwind for Adobe that will likely contribute to its growth for years to come. Consequently, I remain bullish on the stock.
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Growth Shows No Signs of Slowing Down
Quarter after quarter, Adobe’s growth has shown no signs of slowing down. Besides the new growth tailwinds that Adobe is likely to experience in the coming years as a result of integrating its industry-leading AI capabilities within its core creative suite, its core software applications continue to enjoy inexhaustible demand.
The ongoing and continuous growth of social media and content creation plays a pivotal role in driving Adobe’s revenues, as the company holds a virtual monopoly in the creative software space. With the ever-expanding digital landscape, individuals and businesses increasingly rely on Adobe’s suite of products, such as Photoshop, Illustrator, and Premiere Pro, to produce high-quality and engaging content for social media platforms. This trend has contributed to Adobe constantly posting robust revenue growth.
To illustrate Adobe’s impressive revenue growth and the lack of any sign of a slowdown, note that the company has hit a new LTM (last-12-months) revenue figure every quarter for 38 consecutive quarters. In fact, the company’s five-year and 10-year revenue CAGRs (compound annual growth rates) stand at 16.5% and 17%, respectively, showing incredibly consistent in the top line’s expansion year after year.
This theme was evident in Adobe’s most recent Fiscal Q4-2023 results, with constant-currency (CC) revenue growth landing at 13% to a record $19.41 billion. Revenue growth was driven by net new Digital Media ARR of $569 million, propelling revenue to $3.72 billion, up 14% in CC year-over-year. This, in turn, was fueled by innovation in both Adobe’s Creative and Document businesses.
In Creative Cloud, management noted that global demand for content is accelerating, forming a tailwind for the business. Business highlights included strong digital traffic powered by product innovation and rising social engagement. Finally, Adobe’s continued product-led growth efforts, in general, drove record new commercial subscriptions in the quarter.
Turning to Document Cloud, the business also performed well, posting revenue growth of 17% year-over-year to $721 million. The company added a record $171 million of net new Document Cloud ARR, with quarter-end ARR jumping 23% year-over-year in constant currency. In this branch, highlights include Acrobat Web growth, which management believes remains an incredible source of customer acquisition, recording monthly active users up over 70% year-over-year.
AI to Keep Fueling Revenues in FY2024
Adobe posted an increase of 13% in both its Q4 and full-year 2023 results. I believe that the company’s robust, double-digit growth is set to be sustained in FY2024, powered by its ever-improving AI capabilities. In the case of Adobe, AI isn’t just a buzzword. The company has been actually integrating AI into its existing products, with results already seeming unbelievable.
Adobe’s introduction of its Firefly generative AI models and their seamless integration across Creative Cloud earlier in the year sparked immense customer enthusiasm. Since the launch of Firefly in March, the company has achieved an impressive milestone, with over 4.5 billion generations recorded to date. This sets the stage for a potential surge in revenue growth through the innovative concept of “Generative Credits,” an in-app currency consumed with each user-generated creation.
The widespread availability of Photoshop Generative Fill and Generative Expand has witnessed unprecedented adoption rates, quickly becoming integral features within the product. Notably, Generative Credits represent a novel revenue stream for Adobe, poised to gain traction not only among seasoned users of the creative suite but also among newcomers who found Adobe’s applications daunting in the past.
With the advent of AI-driven simplicity, Adobe’s products are now accessible to virtually anyone through straightforward text prompts, eliminating the barriers that once deterred potential users. This breakthrough opens up Adobe’s market to an entirely untapped audience, marking a significant expansion of its user base. Anticipating a substantial impact, I believe that this newfound market opportunity is poised to be a pivotal driver of revenue growth in Fiscal 2024.
Is ADBE Stock a Buy, According to Analysts?
Turning to Wall Street, Adobe has a Strong Buy consensus rating based on 24 Buys, four Holds, and one Sell assigned in the past three months. At $657.85, the average Adobe stock price target suggests 15.1% upside potential over the next 12 months.
If you’re wondering which analyst you should follow if you want to buy and sell ADBE stock, the most profitable analyst covering the stock (on a one-year timeframe) is Derrick Wood of TD Cowen, with an average return of 29.31% per rating and an 81% success rate. Click on the image below to learn more.
The Takeaway
Overall, Adobe’s remarkable 2023 performance, marked by an 80% increase in shares, doesn’t deprive it of further upside in 2024. The company’s unwavering growth, driven by its stronghold in the creative software domain and continuous innovation, is set to last.
With AI, particularly the groundbreaking Firefly models, becoming integral, Adobe is not just adapting to change but leading it. As the digital landscape expands, Adobe’s seamless integration of AI promises sustained growth, which should sustain, if not accelerate, the company’s revenue growth.
Shares may seem pricey at 32.3x FY2024’s expected earnings. However, Adove has rarely traded at a discount, and with such strong tailwinds ahead, I doubt the market will suddenly shy away from paying a reasonable premium for this high-quality tech giant.
