Quantfury Gazette

Adobe (NASDAQ:ADBE) walks tightrope as investors chase dreams of AI magic

Nathan Crooks
Quantfury Team

Adobe Inc. (NASDAQ:ADBE), the developer of the ubiquitous Photoshop software used by professional graphic designers for decades, is facing a Faustian bargain as the ongoing boom in generative AI reshapes the industry. Investors want to make sure the company is keeping up with competing firms building out new text to image tools, but doing so could undermine its core business.

While Adobe’s stock is up almost 80% over the past year, volatile swings related to AI developments are frequent. Last month’s announcement of OpenAI’s new text-to-video generator sent Adobe’s shares plunging 7%. A similar dip occurred a few months earlier, when investors didn’t think an earnings forecast showed enough potential growth from new AI tools like its Firefly product despite record quarterly revenue. 

Indeed, the promise of AI-fueled growth can send shares skyrocketing as investors search for the next Nvidia, whose shares have risen more than 2,000% over the past five years. Cloud computing and software company Oracle (NYSE:ORCL) saw its shares rise 16% earlier this week after it said that interest in generative AI was boosting demand for its services. The writing is on the wall, and any company that doesn’t get on the bandwagon is going to pay a price.

Adobe is entering the fray from a somewhat unique position as it generates the bulk of its revenue from a premium suite of software products that are used by real, live humans who use the tools to make a living. A future based on AI-produced digital media that can be commissioned by novices with simple text instructions would not only undermine its business model, but the livelihoods of its professional users. The classic graphic designer toting around a MacBook Pro loaded up with Adobe apps could be replaced by anyone with a smartphone and a ChatGPT subscription.

But don’t count Adobe out. The company’s products may be more sticky than many think, especially as most of the current AI tools available simply don’t yet measure up to the quality that can be delivered from a professional. Anyone who’s used any of the tools will also quickly notice that outputs can appear to be throttled inside of rules (and worldviews) imposed by their developers, as Google’s (NASDAQ:GOOGL) Gemini model demonstrated recently in an embarrassing and politically charged fail. The tools are great at producing mediocre and at times absurd images that conform to a certain set of rules, but they can’t yet provide the real creativity that will shine amid a torrent of drivel. 

Adobe has already demonstrated its ability to make an old and often derided technology sticky with its second largest digital media business segment revolving around the PDF document format it first developed in 1992. More than 30 years later, there’s still not a better way to electronically deliver a document, and the company continues to make money from it. That should be reassuring to both its investors and clients, who may fear being automated away into oblivion. The company knows how to keep an old product relevant without throwing the baby out with the bathwater. 

Just exactly how Adobe is able to navigate ongoing technological change will serve as a bellwether to the broader economy and balance between automation and human creativity, and it will be worth paying close attention to its revenue mix in the years to come. If the products used and loved by many actual people remain sticky and continue to produce yearly revenue streams, it will be a sign that it will be harder to replace a human workforce than some think and could foreshadow the bursting of an AI bubble. If the company starts to lose ground to its AI-based competitors, or if it starts to pivot away from its classic suite of products to pure AI plays that produce compelling imagery, now that’s when we may all need to start worrying.


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