The company gathered more than 10,000 marketers, filmmakers, and creators at its annual conference this week to highlight how its software is adapting to the AI era. Most people on Wall Street are unsure if Adobe can maintain its dominance as new AI-powered tools make it easier for people to create videos, posters, and graphics without professional software.

Citigroup analyst Tyler Radke warned that Adobe is “at risk of structural AI-driven competitive and pricing pressure,” even though the company has a strong strategy. The company’s shares have lost roughly a quarter of their value this year. Other software firms like Salesforce Inc. and Workday Inc.’s stock prices have also struggled.

Adobe makes move to retain investor confidence

Most popular AI tools used for creating videos and images, such as OpenAI’s Sora or Google’s Veo, are made outside Adobe’s ecosystem. Consumer-focused platforms like Canva are also growing in popularity, allowing people to design without needing Adobe’s professional software. According to analysts from Bloomberg, Adobe’s Digital Media revenue growth is expected to slow over the next few years.

Despite this, analysts like Kirk Materne from Evercore ISI described Adobe’s recent move as “another step toward addressing the ‘existential risk’ question” about the effect of generative AI on its business. During the conference in Los Angeles, Adobe unveiled several new features aimed at keeping AI-focused creators within its platform.

One of the biggest additions is AI models from competitors like Google and OpenAI into Adobe’s tools, including Photoshop. For years, the company promoted its in-house Firefly AI models, which were trained to avoid copyright issues and offensive content. Firefly has already been used to create more than 29 billion images and other assets since launch. However, Adobe is now also buying access to third-party AI models and offering them directly to its customers.

New integration and strategy to keep customers

This new integration will allow creators to choose between Adobe’s Firefly and external AI systems depending on their needs. Adobe makes about $250 million a year from its AI products, but it says AI helps its business in more ways than that. The company now uses a broader term called “AI-influenced revenue,” which means any money earned with help from AI, such as charging higher prices or keeping more customers. By Adobe’s estimate, AI affects about $5 billion of its yearly revenue.

Ely Greenfield, chief technology officer of creative business at Adobe, pointed out that many customers use Firefly for commercial projects but turn to other AI models for brainstorming or experimental work. “People are getting more comfortable with the idea that models are trained on a large number of things,” Greenfield said.

Jackson Ader from KeyBanc noted that customers at the event were enthusiastic about the expanded AI options. “We welcome the strategy as we have been skeptical of Adobe’s ability to compete on the like-for-like merits of AI image and video generation,” he wrote. Adobe’s CEO, Shantanu Narayen, insisted that his firm’s software remains essential for creators who want professional-quality results, and its stock price struggles are mainly due to investors’ distraction with semiconductor companies and AI model developers.

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The new service is expected to be built on the Adobe Firefly family of AI models, which the firm first introduced in 2023 and trained entirely on licensed data. The customized large language models (LLMs) inside the Adobe AI Foundry are capable of producing texts, images, and videos. In addition, the AI models can create other outputs, like 3D scenes, using the Adobe Firefly AI models.

Adobe unveils new AI Foundry for enterprises

After using the AI models to create content, they can also be used to fine-tune the customized models for each enterprise by making use of their intellectual property. Adobe mentioned that it will charge businesses based on usage instead of using a seat-based business model like in its other products. The company, based in San Jose, has been active in the AI industry. In 2023, Adobe released its Firefly models, training them on licensed data.

Firefly is capable of generating images, video, audio, and vector graphics. It also helps creators ideate and collaborate within the platform. Companies have utilized Firefly models to generate over 25 billion assets. Hannah Elsakr, vice president of generative AI new business ventures at Adobe, said, “The way we think about it, maybe more layman’s terms, is that we’re surgically reopening the Firefly-based models”

She also explained that businesses will benefit from all the knowledge in the world that has been built into the image and video models created by Adobe. She added that Adobe incorporates enterprises’ intellectual property (IP), such as brand footage or specific shot styles, into this process. “We then retrain [the model],” she said, describing what Adobe calls continuous pre-training, where the model is overweighted to emphasize certain brand elements.

Elsakr noted that because the firm retains its base model, Adobe sees this process as deep tuning instead of fine-tuning. Most companies fine-tune their large language models by connecting the model’s API and retraining it to respond based on their preferences. Some models can be fine-tuned with a single prompt, with firms like OpenAI making it easy for customers to fine-tune models like its o3 mini for many reasoning tasks.

Elsakr explained that the custom models are designed to help brands with their marketing campaigns. For example, if a company creates an advertisement, the model can automatically adapt it for new seasons, languages, or formats without starting from scratch. This approach lets brands maintain a consistent look and feel while speeding up production. She added that the goal is not to replace designers or marketers but to give them smarter, more capable tools that make personalization and creative adjustments easier.

The Home Depot and Walt Disney Imagineering are two early customers of Adobe AI Foundry. Molly Battin, senior vice president and chief marketing officer at The Home Depot, explained that her company is always looking for new ways to improve customer experience and streamline workflows. “Adobe’s AI Foundry represents an exciting step forward in embracing cutting-edge technologies to deepen customer engagement and deliver impactful content across our digital channels,” She said.

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The projection spurred a notable increase in Adobe’s stock price, marking its most enormous surge over four years.

AI-driven success in creative products

During the last trading session, Adobe’s shares soared by up to 16.5%, reaching the highest intraday gain since March 2020. By the end of 2023, the company’s stock had climbed by 77%, despite a 23% drop just before this recent surge. Adobe’s optimistic financial outlook, especially in digital media net revenue expected to hit $460 million for the current quarter, surpassing the average estimate of $435.2 million, has reassured investors about the company’s position in the competitive AI landscape. 

Other tech giants like Salesforce Inc., Workday Inc., and ServiceNow Inc. have also felt the market shifts due to AI. However, Adobe’s strategic AI enhancements, particularly in Photoshop and Illustrator, have kept it at the forefront. Adobe’s AI model, Firefly, is also being adapted for video editing software like Premiere, and it has already facilitated the creation of over 9 billion images.

Earnings and market performance

Adobe reported earnings that exceeded Wall Street’s expectations for the fiscal second quarter. The company posted a revenue of $5.31 billion, a 10% increase from the previous year, and profits of $4.48 per share, excluding certain expenses, surpassing the forecasted $4.40 per share. 

This financial success can largely be attributed to customer upgrades to higher-tier plans, particularly those incorporating the Firefly technology. Adobe has also adjusted its full-year earnings forecast, expecting up to $18.20 per share from the previously anticipated $18. Adobe has been focusing on broadening its user base, particularly among students and non-professional creators gravitating towards simpler platforms like Canva Inc. 

Adobe Express, the company’s latest offering aimed at casual creators, saw a significant increase in user engagement, with monthly active users doubling over the past quarter. David Wadhwani, Adobe’s Senior Vice President of the Creative segment, highlighted the company’s unique AI-driven approach as a critical factor in attracting and retaining users.

Boost in document cloud business

The company’s Document Cloud segment saw notable growth, with $165 million in new annual recurring business for the quarter, significantly above the expected $122.7 million. This increase is attributed to the adoption of new AI-assisted features that enhance document analysis and interpretation functionality. 

Despite recent controversies over its terms of service regarding using customer content for AI training, Adobe has clarified its stance, ensuring users do not utilize unpublished work for AI training purposes, aiming to maintain trust and transparency with its user base. Adobe’s strategic emphasis on AI underscores its commitment to innovation and signals a robust growth trajectory that could redefine its market standing in the coming years. As AI continues influencing the digital media landscape and creative products, Adobe’s proactive approach may set a benchmark for the industry.

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