As an Adobe shareholder, we’re pleased to see that our customers see value in our Generative-AI-powered services and are interested in how these services can drive revenue growth.
This week, the Photoshop maker held its annual user conference Adobe Max, where it announced new AI services. Sadly, while expecting that there will be another really strong player, [November-ending] According to ‘Quarterly’ wall street journal, Adobe ignored fulfilling my curiosity.
Despite this, the company’s stock is up 5% since October 10, when Adobe Max was launched, and 66% so far in 2023.
In an October 11 interview with Anil Chakravarthy, president of Adobe’s Digital Experience Business and Worldwide Field Operations, I discussed the following that could help estimate revenue growth for Adobe’s generative AI: We learned more about some of the factors.
- higher price. Adobe will increase the price of Creative Cloud, its graphic design, video editing and photography software, by “approximately 9% to 10%” in November. CNET report. Unfortunately, an Adobe spokesperson declined to specify average usage costs, as they “may vary depending on the size of your organization and expected usage.”
- Expanding the total addressable market. Chakravarthy said Adobe plans to share with analysts at its next analyst meeting how Generative AI will expand TAM.
- New use cases for existing products. Chakravarthy predicts a surge in the need for marketers to create content that meets social media demands. He envisions Generative AI helping companies tailor their marketing messages to specific customer segments and share content to relevant social media such as Instagram and TikTok.
- The number of users has increased dramatically. Generative AI makes Adobe Analytics, a tool for tracking the effectiveness of marketing campaigns, and Experience Manager, a content and digital asset management service, more accessible to more people. “We think the number of people who can use these tools will increase five to 10 times,” Chakravarthy said.
- Content creators will be much more productive. New AI features in Photoshop could speed up the editing process, and an upcoming “conversational” version of the Acrobat software will be able to read, analyze, and create PDF documents. Bernstein’s Mark Moadler expects Adobe’s AI tools to save users “hours of repetitive, mundane tasks.” journal report.
One of the risks for Adobe is the high operating costs of Generative AI tools. Chakravarthy said Adobe’s prices are below the value its products provide to customers and that “high operating costs are offset by price increases.”
Perhaps this may help explain why analysts “expect Adobe’s adjusted operating margin to remain above 45% despite the high cost of enhancing its AI services.” yeah. journal report.
At the end of the day, I don’t have enough information to properly estimate how much Generative AI will add to the value of Adobe stock. The recent stock price rally suggests investors have concluded that the Photoshop provider will grow faster than the 10% that analysts expected.
From acquisition growth to product innovation
This year, Adobe Max marks a return to the company’s tradition of growth through internally developed product innovation rather than acquisitions.
While the company’s 2022 user conference featured detailed financial projections and talks about Figma (at $20 billion, the largest acquisition in Adobe’s history comes 13 months after regulatory review), this week’s conference I briefly talked about the financial details, but talked about the long-term vision. journal I got it.
Some analysts are excited about Adobe, with revenue growth expected to be 10% for the fiscal year ending November 2023 (the lowest level in nearly a decade).
Why?Morgan Stanley MS Keith Weiss wrote that Adobe analysts’ day was “minor on the numbers” [and] Vision is important. Brent Till of Jefferies called this day the “fastest pace of innovation in 20 years,” and Alex Zukin of Wolf Research said in a note to customers that Adobe is “developing the entire product suite to truly AI.” I’m remaking it natively,” he wrote. journal report.
Adobe is scheduled to release its fiscal year 2024 revenue forecast in December, which analysts say translates into 12% growth, two percentage points above the company’s fiscal year 2023 forecast. He pointed out that there are. journal.
Why customers value new Adobe products
Adobe’s Generative AI vision “offers some of the clearest use cases that we believe will be particularly popular with our user base.” Launched in beta trials earlier this year, the Firefly image generation tool is now in its first phase. There are now two generations. [dubbed Firefly Model 2] — New versions for audio, video, and 3D image creation announced this week. ” journal report.
Model 2 allows users to overcome writer’s block. “Customers can use Firefly technology in Photoshop. If a user has an image, they can enter it as a prompt and new content will be generated. Just like writers, creative people can experience writer’s block. Yes, they can use Firefly to create ideas. It gives them a great starting point,” Chakravarthy said.
Generative AI can help meet the growing demand for content. “Firefly enables business executives to scale content creation for digital marketing and personalization. Over the next two years, content needs will increase 5x. To scale in an agile way, automate “Companies buy from Adobe because they no longer have to train their employees on 10 different tools,” he explained.
According to Alexandru Costin, Adobe’s vice president of generative AI, the adoption rate of Photoshop’s AI capabilities is 10 times higher than average at the time of major product launch. “The way we’ve achieved this with Firefly models is by integrating them natively into his workflow,” says Costin. bloomberg.
Adobe’s new prices
Adobe is Price increase in November. Adobe’s subscription plan allows customers to use his Firefly multiple times a month, but Adobe will increase his Creative Cloud prices by about 9% to 10% in November. CNET report.
Adobe uses the following systems generation credits For tools like Firefly, journal It is explained that “users who use the service more frequently” are needed. [to] Pay more for the privilege. Adobe says customers can use Adobe’s Generative Credits to “transform text-based prompts into images and vector creations in Photoshop, Illustrator, Express, and Firefly web applications.”
Adobe must cover the costly burden that Generative AI places on Adobe’s cloud computing operations. These costs are driven by the “high price of his Nvidia processors, which handle most generative AI work,” and the inability of regular laptops to host large-scale AI models. . CNET report.
Adobe’s pricing strategy encourages broader adoption, which may help cover higher operating costs. “Generated credits allow users to experiment without worrying about whether they’re spending too much. Firefly has produced over 3 billion works to date. The value of a product is ours. It outweighs the price increase and helps Adobe shoulder more of the operating costs of Generative AI,” Chakravarthy told me.
How generative AI meets the booming demand for marketing content
Generative AI could add to the already significant number of customers using Adobe’s Experience Cloud, a service for “delivering, measuring, and personalizing customer experiences.”
How substantial is it? An Adobe spokesperson told me in his Oct. 12 email that the service currently serves “more than 12,000 of his customers, including 87% of Fortune 100 companies and 74% of Fortune 500 companies.” It is said that it is used by “.
Adobe Analytics has customers among leaders in many industries. “In retail, nine of the top 10 brands in the U.S. rely on AA to understand shopper behavior as they transition from online to in-store,” the spokesperson wrote. He provided similar Adobe customer numbers for hotels, airlines, financial services, media, healthcare, and other industries.
Adobe expects Generative AI to expand its market opportunities and grow its user base. “It expands our overall addressable market. We plan to announce new TAM numbers at our next analyst meeting.” Adobe Chief Strategy Officer Scott Belsky said, “Generative AI will raise the ceiling , lowering the bar.” You will be able to create more electronic content, creating new use cases. We charge a fee per user. Our new product will increase the number of users and frequency of use,” said Chakravarthy.
The future of Adobe’s generative AI
Adobe says its customers appreciate its current Generative AI products and plans to introduce more.
Adobe believes customers can derive significant business benefits from Generative AI.
“Generative AI brings agility. Once you create a campaign, this technology allows you to share it faster on Instagram and TikTok. By automating much of the content creation process, content creators can spend more time doing creative work. Overall, Generative AI allows companies to produce more creative assets for the same cost. More Attract more Creative Cloud subscribers. Enable more segment-specific campaigns, increase customer acquisition, increase customer engagement, and increase customer retention,” Chakravarthy said.
Adobe sees a bright future for generative AI in its products. “We see huge potential. We can also expand into video and 3D. We will integrate Generative AI into the creative, document, and experience cloud. Generative AI will help our customers use technology to create new uses.” It will allow us to develop cases more quickly,” he told me.
There is not enough information to quantify the impact of these terms on revenue. On October 10, Adobe Chief Financial Officer Daniel Dern said, “We expect to achieve stable and consistent operating margins throughout this investment cycle.”
CNN reports that 29 analysts have an average 12-month price target for Adobe of $610, 10.3% above Friday’s closing price.
The company’s stock has risen significantly in 2023, so it could be in for a nasty shock if investor expectations outpace the growth Adobe actually delivers.
Disclosure: I have owned Adobe stock since 2005, when Adobe acquired Macromedia.
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