Adobe (ADBE) has long been a leader in creative and digital software, but its stock has lagged the broader market. Down approximately 12% year-to-date and over 14% in the past 12 months, ADBE stock has underperformed the S&P 500 Index ($SPX), which is up 2.2% so far this year and over 11% in one year. Yet despite this slump, there’s positive development around Adobe’s AI strategy and its potential to turn the tide.

Adobe has integrated artificial intelligence (AI) across its product portfolio to improve user experience, increase adoption, and boost monetization. Its recent quarterly results show that its AI strategy is gaining traction, as reflected in a growing user base and increased monetization.

AI-Integration Powering Growth

In the second quarter of fiscal 2025, Adobe reported revenue of $5.87 billion, reflecting an 11% increase compared to the same period last year. Adjusted earnings per share climbed 13% year-over-year to $5.06. These numbers were driven in large part by the company’s integration of AI across its product portfolio.

Adobe’s Digital Media segment saw revenues of $4.35 billion, up 11% year-over-year. The annual recurring revenue (ARR) in this segment reached $18.09 billion, representing a 12.1% rise year-over-year. The strength in the company’s ARR provides a solid platform for future growth, as it represents the strength of Adobe’s subscription model, which generates predictable, recurring revenue from its broad base of creative and business users.

Adobe has experienced strong growth due to the increasing adoption, usage, and monetization of its AI-powered tools, including Acrobat AI Assistant, Acrobat Premium, and Express. These products have helped significantly expand its user base, with monthly active users (MAUs) increasing by more than 25% year-over-year. Demand for Express’ creative features, especially when accessed through Acrobat, has surged, driving an 11-fold jump in its MAUs compared to last year. Mobile performance has also been impressive, with strong app store engagement contributing to a more than 40% increase in ending annual recurring revenue (ARR) for both Acrobat and Express.

Among creative professionals, Adobe’s flagship Creative Cloud (CC) tools, led by popular apps like Photoshop and Lightroom, continue to perform well, particularly in emerging markets. New offerings like the Firefly web app and Photoshop’s mobile extensions are gaining traction. Adobe’s generative AI tool Firefly and CC tools are seeing rapid adoption, with over 24 billion generations by the end of the quarter. Its use is expanding quickly, primarily through integration with platforms such as GenStudio and Firefly Services.

The company’s Digital Experience segment, which includes digital marketing tools, also performed well, generating $1.46 billion in revenue, up 10% year-over-year. Subscription revenue within this segment rose 11%. Here, Adobe’s AI-first offerings, such as GenStudio and Prime/Ultimate tiers, are drawing interest from businesses looking to personalize customer experiences at scale. ARR for GenStudio jumped more than 25%, and Adobe Experience Platform (AEP) and Apps subscriptions saw revenue growth of over 40%.

Upward Revisions to FY25 Outlook

Adobe’s solid performance in Q2 has led the company to revise its full-year targets upward. It now expects total FY25 revenue between $23.50 billion and $23.60 billion, slightly up from earlier guidance. The Digital Media segment is expected to generate up to $17.50 billion, while adjusted EPS is projected to fall between $20.50 and $20.70, higher than the previously estimated range of $20.20 to $20.50. Importantly, Adobe is on pace to surpass $250 million in direct ARR from AI-first products by year-end.

What’s Ahead for Adobe Stock?

Despite these bullish indicators, Adobe stock still faces challenges. The generative AI space is becoming increasingly crowded, with competitors offering alternatives in areas such as text-to-image, video generation, and multi-modal content creation, many of which target Adobe’s core user base. These threats, combined with broader economic uncertainty, keep Wall Street analysts cautiously optimistic.

Analysts maintain a “Moderate Buy” consensus rating on ADBE stock. However, the average price target of $505.30 represents roughly 22% upside from current levels.

In short, if Adobe can continue executing its AI strategy while fending off rising competition, 2025 could mark a rebound for ADBE stock.