AdobeQ4 guidance disappoints investors, but Wall Street remains optimistic about its prospects in generative AI.

According to Dolphin Research APP, Adobe (ADBE.US) announced its financial results for the third quarter of the 2023 fiscal year ending on September 1, 2023, after the US stock market closed this Thursday. Despite Adobe's disappointing revenue guidance for the fourth quarter, which led to a more than 4% drop in its stock price on Friday, most Wall Street banks still have a positive outlook on Adobe.

The earnings report shows that Adobe's Q3 revenue increased by 10% YoY to $4.89 billion, surpassing the market's expectation of $4.87 billion. The net profit was $1.403 billion, compared to $1.136 billion in the same period last year. The adjusted earnings per share were $4.09, higher than the market's expectation of $3.98.

In terms of business segments, the Digital Media division, including iconic products like Photoshop, saw a revenue growth of 11% to $3.59 billion, while the Digital Experience division, including marketing and analytics software, saw a revenue growth of 10% to $1.23 billion.

Adobe has long been a leader in creative software for graphic arts professionals, and the company is adding generative AI capabilities to its products. Starting from November 1, the company will raise the prices of its products and charge additional fees for advanced users of AI features.

Adobe expects its fourth-quarter revenue to be between $4.98 billion and $5.03 billion, with analysts' average forecast at $5 billion. The adjusted earnings per share are expected to be between $4.10 and $4.15, higher than the market's expectation of $4.06. Although Adobe's revenue guidance meets analysts' expectations, it disappoints investors who had anticipated that the demand for the company's AI tools would boost revenue.

However, BMO Capital Markets sees Adobe's solid quarterly performance and financial guidance. They have raised Adobe's target price to $645 and maintained an "outperform" rating on the stock. The bank believes that investors should recognize Adobe's significant opportunity in generative AI, which has been meaningful for several years.

Goldman Sachs reiterated its "buy" rating on Adobe and raised its target price from $550 to $625. Goldman Sachs believes that Adobe is still a beneficiary of generative AI. The bank pointed out that since Adobe announced its second-quarter earnings report, the stock price has risen by about 12%, outperforming the 1% increase in the Nasdaq index during the same period.

Goldman Sachs stated that Adobe will quickly monetize its AI tools starting from November 1, which represents a strategic shift in its long-standing Product-Led Growth (PLG) model. The bank expects that in the coming months, new net users will have an initial impact on this model, and the impact of price increases will gradually penetrate the entire model over the next three years. The bank believes that a 6%-10% price increase in certain Creative Cloud plans appropriately captures strong customer demand while offsetting the high costs of these services. Morgan Stanley maintains its "overweight" rating on Adobe and notes that the company's Digital Media segment's net annual recurring revenue (ARR) exceeded market expectations by 12%, demonstrating strong growth momentum in its core business. The bank further adds that the preliminary investigation into Adobe's potential in the field of generative artificial intelligence is impressive, instilling more confidence in its forecast for the fiscal year 2024.

Wells Fargo also maintains its "overweight" rating on Adobe and raises the target price from $625 to $650. The bank states that the monetization details of generative AI tools will help lay the foundation for the company's upcoming Max conference next month. The bank expects Adobe's AI product roadmap to expand during the event.