Adobe Q3 Earnings Preview: Can AI Revive Investor Confidence?

Adobe ($ADBE) is heading into its third-quarter earnings announcement on Thursday, September 11, under a cloud of mixed sentiment. For much of the past year, the company has found itself at the center of the AI conversation, both as a potential beneficiary and as a possible victim.

On one hand, Adobe’s Firefly and GenStudio platforms showcase how generative AI can be woven into creative workflows. On the other, the very rise of AI has opened the door for challengers like Canva, Figma, Midjourney, and Runway, which are threatening to erode Adobe’s dominance in the creative software space.

This tension has been mirrored in Adobe’s stock performance. Despite delivering steady revenue and profit growth of around 8% annually, the shares have dropped more than 20% year-to-date and nearly 38% over the past 12 months.

Source: Yahoo Finance

Investors who once rewarded Adobe for its recurring revenue model and high margins are now questioning whether its moat is narrowing in the age of AI. The market is asking a simple but crucial question: is Adobe an undervalued comeback story, or is it a company struggling to adapt to an era of disruption?

Looking back at the second quarter, Adobe gave investors reasons for optimism. Revenue came in at $5.87 billion, an 11% year-on-year increase that exceeded expectations. Management also raised full-year guidance, projecting revenue of $23.5–23.6 billion and adjusted earnings per share between $20.50 and $20.70, both above prior forecasts.

Source: GoAI (👉 Full GoAI analysis)

Guidance for Q3 points to earnings of around $5.17 per share on revenue of about $5.9 billion—roughly a 9% year-over-year improvement. Those are healthy numbers, especially in a tech landscape where some software peers are struggling to sustain double-digit growth.

Wall Street analysts are broadly in line with this outlook, with consensus estimates also calling for EPS of $5.17 and revenue near $5.9 billion. Segment-wise, expectations are for Digital Media revenue to come in around $4.38 billion and Digital Experience around $1.46 billion, both representing high single-digit growth from last year.

But numbers alone don’t tell the whole story. The bigger narrative lies in how Adobe is positioning itself in AI.

Firefly subscriptions have nearly doubled since launch, and GenStudio has posted rapid quarter-over-quarter growth, with annual recurring revenue expected to reach $250 million in fiscal 2025. These are encouraging signs that Adobe is not only building AI features but also finding ways to monetize them.

Analysts at Goldman Sachs have gone as far as calling Adobe’s AI platforms a potential $4 billion opportunity if adoption scales. Bulls argue that this could mark an inflection point: if AI becomes a core revenue driver rather than a headline grabber, Adobe could re-rate higher from its current discounted multiple.

Yet, the bearish case is just as compelling. Some analysts, including those at Melius Research and Rothschild, have downgraded Adobe to “Sell,” citing fears that AI is in fact “eating software.”

In this view, the proliferation of free or low-cost generative AI tools undermines Adobe’s pricing power and challenges its long-standing subscription model. Why pay $50 a month for Creative Cloud if rival platforms can deliver AI-generated results at a fraction of the cost? It is this existential question that has weighed most heavily on the stock over the past year.

Valuation also adds to the debate. Adobe currently trades at about 25 times forward earnings, which is slightly below its historical average and at a discount to many large-cap software peers. Some value-oriented investors see this as a buying opportunity, pointing to Adobe’s enviable 90% gross margins and free cash flow margins above 30%.

They argue that even with slowing ARR growth, the company’s combination of brand power, recurring revenue, and operational efficiency makes it difficult to bet against in the long run. On forums like r/ValueInvesting, some investors are even modeling fair values well north of $700 per share, nearly double where it trades today.

Still, the skeptics are not without evidence. Net new Creative Cloud annual recurring revenue has slowed from over 9% growth a year ago to just above 3% in the latest quarter, suggesting that Adobe’s once-rapid expansion is moderating.

Meanwhile, the competitive landscape is only intensifying, with rivals targeting niche markets that Adobe once comfortably owned. In this environment, maintaining pricing power and defending market share could prove far more difficult than it did in the pre-AI era.

So what should investors focus on when Adobe reports on Thursday?

Beyond the headline EPS and revenue numbers, attention will be on whether AI-related revenue is growing fast enough to move the needle, and whether management provides clarity on how pricing and customer adoption are holding up.

Any commentary on partnerships, integration of Firefly across Creative Cloud, or the progress of GenStudio could help investors gauge whether Adobe is successfully monetizing its AI push or simply riding the hype cycle.

For now, Adobe represents one of the most intriguing risk-reward plays in large-cap tech. The stock has already been punished heavily, leaving room for upside if execution and guidance impress.

But the opposite is also true: another quarter of cautious commentary or evidence of slowing ARR growth could reinforce the bear case and keep the stock under pressure.

In short, Adobe’s Q3 report won’t just be another earnings update. It’s shaping up as a reality check on whether the company’s AI ambitions can translate into durable growth, or whether the market’s skepticism is justified.

Investors looking at Adobe today are essentially making a call on the future of creative software itself—whether it remains Adobe’s kingdom, or whether the AI revolution has already begun to chip away at its crown.