Adobe (NASDAQ: ADBE) inventory offered off on Friday after the software program large reported report income however muted Q2 fiscal 2024 steering. The inventory is now down round 20% since Feb. 1 in what has in any other case been an amazing interval for the broader market and for synthetic intelligence (AI) fueled development shares.Let’s dive into Adobe’s outcomes and administration commentary to find out if it is a dangerous omen for the AI theme, or if Adobe’s points are extra company-specific.Picture supply: Getty Photographs.An AI-driven investmentTo some extent, Adobe has at all times been an AI play. It is simply that the buzzword is being thrown round extra these days.The corporate’s flagship bundle, Artistic Cloud, contains a suite of purposes and instruments to assist creators design, edit, and work together with totally different types of media — specifically textual content, photographs, and video. Nonetheless, Adobe’s development had slowed in recent times, and the corporate wanted a brand new catalyst to spur funding pleasure.On March 21, Adobe unveiled Firefly, a generative AI instrument for Artistic Cloud, Doc Cloud, Expertise Cloud, and Adobe Categorical workflows. The launch of Firefly and the prospect of monetizing AI helped Adobe inventory acquire over 77% final yr.Adobe’s current earnings name marked a momentum change and the tough actuality that though these new purposes have an extended runway, that does not essentially imply there might be a right away influence on its short-term outcomes.Adobe’s Q2 fiscal 2024 steering was weak, and the corporate selected to not give an replace on full-year steering, whereas it had given fiscal full-year 2024 steering on its This fall fiscal 2024 earnings name in December. The market hates uncertainty, so it is no shock why the majority of the question-and-answer session consisted of analysts obsessing over quarterly outcomes and financial 2024 efficiency as an alternative of Adobe’s long-term investments and the place the corporate might be three to 5 years from now.AI’s measurable influence on Adobe’s growthUsers of Adobe Firefly via Artistic Cloud and Adobe Categorical have already generated 6.5 billion belongings like photographs, vectors, designs, and textual content results. Adobe reported report new business subscriptions in Artistic Cloud and teased new merchandise for Adobe Categorical with Firefly for cell, Firefly Providers, and an AI assistant for Adobe Acrobat. The corporate is investing closely in its product rollout and making noticeable progress throughout its present merchandise and cell instruments, and even introducing new merchandise like AI-powered Improve Speech, which robotically dubs a video right into a language of the person’s alternative.Story continuesThat mentioned, if there have been ever a time to take quarterly outcomes with a grain of salt, it is now. Adobe is coping with a one-time $1 billion cost for terminating its acquisition of Figma, a deal introduced in September 2022. What’s extra, lots of the investments in product innovation most likely will not be felt for a number of years.On the earnings name, Adobe clarified that it’s centered on buying as many customers as doable. The thought is that with good buyer acquisition and retention, Adobe can monetize its person base over time. Adobe was one of many pioneers of the software-as-a-service (SaaS) enterprise mannequin, and it’s sticking to its roots in the way it approaches AI.A key a part of the earnings name was when Adobe CEO Shantanu Narayen expressed the variations between experimentation and monetization on its platforms. In some ways, Adobe remains to be determining what’s going to keep on with customers. It does no good to speculate billions of {dollars} in instruments that customers both will not use or that the corporate cannot justify worth will increase for down the road.That leads us to probably the most important problem with Adobe, which is getting cash from AI. Since Adobe is a subscription enterprise, it has to help elevated capital expenditures by rising its buyer base and income per person. A comparability can be Netflix, which has to justify worth will increase by making its service extra beneficial to shoppers via high quality reveals and content material spending.The excellent news is that Adobe’s buyer base is generally companies and, to a lesser extent, college students and particular person creators. So it is not that depending on the energy of the patron. If its prospects can use AI-based instruments like Firefly to do their jobs sooner and higher, then worth will increase needs to be absorbed naturally. However it will be a mistake to imagine it is a given.A large buyback programAdobe’s funding thesis is all about consistency. Gradual development from dependable subscription income fuels innovation and an underrated capital return program.Over the past 10 years, Adobe has decreased its excellent share rely by 9.2% regardless of its stock-based compensation hovering over 400%. It simply introduced a brand new $25 billion inventory repurchase program over the subsequent 4 years. At a market cap of round $227 billion on the time of this writing, simple arithmetic tells us that Adobe plans to cut back its share rely by 11% or so over the subsequent 4 years, which is greater than double the speed over the past decade.Shopping for again inventory spreads earnings over a smaller variety of shares, which boosts earnings per share (EPS) and makes Adobe a greater worth. It is a solution to artificially enhance EPS even when the underlying enterprise is not posting one of the best natural development.Adobe is not in that place; actually, its natural development is sort of good. However the firm’s resolution to not replace its full-year steering signifies development is probably not nearly as good as buyers hoped when Adobe was hovering round a 52-week excessive simply six weeks in the past.Reeling in expectationsAdobe did not sign a purple flag for AI development shares, however it did remind buyers of the place their focus needs to be, which is not on the subsequent quarter or yr, however on how AI enhances the general funding thesis. Adobe has a transparent, easy solution to monetize AI, which makes it one of many extra intriguing long-term performs on the market.Even after promoting off, Adobe is not an inexpensive inventory. It is higher to not focus an excessive amount of on trailing earnings due to the Figma one-time impairment. For fiscal 2025, analysts anticipate $20.30 in EPS, which might imply a price-to-earnings ratio of 24.6. However that is primarily based on full-year earnings seven quarters from now.Adobe is not a screaming purchase, however the market is underestimating its development potential. Adobe is value including to a watch checklist and even opening a starter place in. But when Adobe undergoes a chronic sell-off, the valuation will look too low-cost to disregard.Must you make investments $1,000 in Adobe proper now?Before you purchase inventory in Adobe, think about this:The Motley Idiot Inventory Advisor analyst crew simply recognized what they imagine are the 10 greatest shares for buyers to purchase now… and Adobe wasn’t considered one of them. The ten shares that made the lower may produce monster returns within the coming years.Inventory Advisor supplies buyers with an easy-to-follow blueprint for fulfillment, together with steering on constructing a portfolio, common updates from analysts, and two new inventory picks every month. The Inventory Advisor service has greater than tripled the return of S&P 500 since 2002*.See the ten shares*Inventory Advisor returns as of March 11, 2024Daniel Foelber has no place in any of the shares talked about. The Motley Idiot has positions in and recommends Adobe and Netflix. The Motley Idiot has a disclosure coverage.Did Adobe Simply Sign a Pink Flag for AI Development Shares? was initially revealed by The Motley Idiot