Why is Adobe stock falling despite a revenue and earnings beat?

Adobe beat Wall Street estimates for third-quarter revenue on Thursday as demand for its AI-integrated products continued to grow, but a softer-than-expected fourth-quarter outlook raised fresh questions about the software maker’s competitive position.

Shares of the San Jose, California-based company fell 2.5% during premarket trading on Friday.

Adobe reported quarterly revenue of $6.76 billion, slightly above analysts’ average estimate of $6.70 billion, according to LSEG data.

Adjusted earnings came in at $6.13 per share, compared with expectations of $6.09.

"Adobe's beat on revenue expectations could ease some investor concerns that the company has lost its footing," Emarketer analyst Grace Harmon said.

The stock has fallen 25% this year.

AI products gain traction

Adobe has been adding artificial intelligence features across its creative and customer-experience software as it seeks to defend its market position against newer AI-powered rivals.

The company said annual recurring revenue from its AI-first products more than doubled from a year earlier, rising 150% during the quarter.

Adobe also said its broader creativity and productivity products now have more than 1 billion monthly active users.

Its push into AI also includes a growing freemium strategy designed to attract users and eventually convert them into paying customers.

Monthly active users of the company’s freemium creative products surpassed 100 million during the quarter, an increase of more than 70% from a year earlier.

The strategy, however, is creating some near-term pressure on Adobe’s growth metrics.

Executives attributed a slowdown in remaining performance obligation growth and a decline in net new annual recurring revenue partly to the expansion of its freemium offerings.

Soft outlook raises concerns

For the fourth quarter, Adobe forecast revenue between $6.80 billion and $6.85 billion.

The midpoint of $6.825 billion was slightly below analysts’ estimate of $6.85 billion.

That guidance overshadowed the revenue and earnings beat, particularly as Adobe faces increasing competition from AI-focused design platforms such as Figma and Canva.

Rebecca Wettemann, principal analyst at technology research firm Valoir, described the quarter as essentially meeting investor expectations.

"In this environment, you can't just meet," she said in emailed comments reported by MarketWatch. Rather, companies "have to beat and drive the narrative."

Harmon said the weaker fourth-quarter forecast raises questions about Adobe’s competitive position and the strategy its incoming CEO will pursue as AI continues to reshape the creative software market.

Leadership transition adds pressure

Adobe is also approaching a significant leadership transition at a time when investors are demanding stronger evidence that its AI investments can translate into sustained growth.

The company last week named Anil Chakravarthy as its next CEO.

Longtime chief executive Shantanu Narayen is scheduled to become executive chair on December 1.

Adobe has also been dealing with changes elsewhere in its leadership team.

CFO Dan Durn left in June to become finance chief at Marvell Technology, with Steve Day taking over on an interim basis.

David Wadhwani, president of Adobe’s Creativity and Productivity business, is also due to step down on September 27.

Wettemann said the timing adds to the pressure facing Chakravarthy.

"A mediocre quarter right before the CEO handoff is the worst possible timing," Wettemann wrote.

"Chakravarthy walks into the job Dec. 1 carrying investor doubt instead of a running start, with the CFO seat still unfilled."

Adobe’s latest results therefore leave investors weighing two competing signals: rapidly expanding adoption of its AI products and a business still struggling to convince the market that those gains will translate into accelerating growth.