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Can Adobe and Oracle Catch Up in the AI Arms Race?

Published 06/23/2023, 02:52 AM
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Artificial intelligence (AI) is definitely a new buzzword on Wall Street. In this context, both Adobe (NASDAQ:ADBE) and Oracle (NYSE:ORCL) have seen their stocks surge this year, thanks to Wall Street's building frenzy around AI.

While these two are not often mentioned as obvious beneficiaries of the generative AI revolution that is unravelling, both have significant exposure to this rapidly surging market. Adobe and Oracle shares are up 41.9% and 49.4% year-to-date, outperforming the Nasdaq Composite Index (+29%).

Adobe’s Push Into AI Fuels Recovery

Adobe shares edged higher last week after the software company boosted its adjusted earnings per share guidance for the full year. The company’s stock is up over 40% since mid-May as investors are weighing positively on the company’s efforts to increase exposure to generative AI market.

For its second fiscal quarter, the company reported adjusted EPS of $3.91, ahead of the Street at $3.79. Revenue increased by almost 10% year-over-year to $4.82 billion, again just ahead of the consensus of $4.77 billion. Adobe said its subscription revenue rose 11% to $4.52 billion. The company also generated $130 million and $169 million from product and services sales, respectively.

Net new Digital Media Annualized Recurring Revenue (ARR), one of the closely-watched financial metrics for software companies, stood at $470 million, pushing the total Digital Media ARR to $14.14 billion. Creative ARR grew to $11.64 billion and Document Cloud ARR grew to $2.50 billion.

Adobe also said it repurchased approximately 2.7 million shares during the quarter while its cash flows from operations were $2.14 billion.

“Adobe’s ground-breaking innovation positions us to lead the new era of generative AI given our rich datasets, foundation models and ubiquitous product interfaces,” said Shantanu Narayen, chair and CEO, Adobe.

As expected, the company offered a FQ3 forecast and updated its full-year guidance. For this quarter, Adobe sees adjusted EPS in the region of $3.95-4.00, beating the consensus of $3.89. The new full-year profit outlook now calls for the adjusted EPS of $15.70 (up or down 5 cents), up from the prior forecast of $15.45 and ahead of the Street at $15.50.

The company’s CFO, Dan Durn, says the company is well-positioned to hit its annual targets.

“Our unique ability to deliver top- and bottom-line growth while investing in groundbreaking innovation sets us up to capitalize on our massive $200+ billion market opportunity,” he noted in the press release.

In March this year, Adobe unveiled Firefly – described as a new family of creative generative AI models that is initially focused on the generation of images and text effects. The new AI-powered tool is introduced to enhance the precision, power, and speed of Adobe’s core products, such as Cloud, Document Cloud, Experience Cloud and Adobe Express workflows.

“With Firefly, Adobe will bring generative AI-powered ‘creative ingredients’ directly into customers’ workflows, increasing productivity and creative expression for all creators from high-end creative professionals to the long tail of the creator economy,” said David Wadhwani, president, Digital Media Business, Adobe.

Earlier this month, Adobe said that its Illustrator tool now also includes Firefly-powered Generative Recolor to boost color variation.

“In our view, the fact remains that Adobe has the ‘trifecta’ … of characteristics to be an AI winner -– scale, unique data sets, and a large monetizable customer base,” Evercore ISI analyst Kirk Materne said.

AI Allows Oracle to Print Record Highs

Oracle stock is on the up again as AI-frenzy fuels demand for its cloud services. Last week’s earnings report showed that the company’s Infrastructure cloud services and license support segment rose 15% year-over-year to $4.98 billion.

For its fourth fiscal quarter, Oracle posted adjusted EPS of $1.67 on revenue of $13.84 billion (up 17% YoY). At a constant currency basis, revenue rose 18%, ahead of the expected increase of 17.6%. The adjusted operating margin fell 300 basis points to 44% from last year’s 47%.

Oracle delivered a beat across all key segments with Cloud, Applications, and Infrastructure services all topping analyst targets for the fourth fiscal quarter. Service revenue surged 76% YoY to $1.47 billion.

“Our infrastructure growth rate has been accelerating—with 63% growth for the full year, and 77% growth in the fourth quarter. Our cloud applications growth rate also accelerated in FY23. So, both of our two strategic cloud businesses are getting bigger—and growing faster. That bodes well for another strong year in FY24,” said Oracle CEO, Safra Catz.

The company’s founder and CTO, Larry Ellison said that Oracle’s Gen2 Cloud “has quickly become the number 1 choice for running Generative AI workloads.”

"Why? Because Oracle has the highest performance, lowest cost GPU cluster technology in the world,” Ellison noted in a press release.

He added that Nvidia (NASDAQ:NVDA), arguably the biggest beneficiary of the generative AI frenzy, has been using Oracle’s clusters. Ellison said that over 30 AI development businesses has recently signed to buy over $2 billion of capacity in Oracle's Gen2 Cloud.

Such comments bode well for the current Wall Street environment with money managers seeking to increase exposure to anything related to AI. Wolfe Research analysts upgraded Oracle shares to Outperform earlier this month.

According to their analyst Alex Zukin, Oracle’s cloud infrastructure business could double its market share by 2025 “on the backs of architectural advantages, partnerships” and tailwinds related to generative AI.

Earlier this month, Oracle partnered with Cohere to provide generative AI services. This partnership showcases Oracle’s increased efforts to provide original generative AI services to organizations and enterprises worldwide and help them automate their end-to-end business processes.

Oracle shares rose almost 25% in the last few weeks on the back of the generative AI frenzy.

Summary

Oracle and Adobe shares have gained in recent months on the back of the momentum seen in tech stocks, which continue to rally as the generative AI race continues to create buzz. Both sets of shares added to prior gains last week following stronger-than-expected quarterly earnings reports, as well as positive updates about the deeper push into the generative AI offerings.

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Neither the author, Shane Neagle, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

This article was originally published on The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

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