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Artificial intelligence (AI) has been a central theme in the investing world this year. Many investors have been drawn to companies that leverage AI to create or enhance their products and services. Adobe (NASDAQ: ADBE), a pioneer in the digital content arena, has been a prime beneficiary of this trend. The software giant has seen its stock price surge by 63.2% year to date, partly because of the launch of its new generative AI feature called Firefly.

Adobe’s impressive stock performance isn’t simply based on hype, however. The company has also delivered solid organic growth, as evidenced by its record-breaking revenue in the third quarter of 2023. Let’s take a closer look at how Adobe achieved this important financial milestone, and whether its shares are still worth buying at current levels.

ADBE Revenue (Quarterly) data by YCharts

Adobe’s record quarter in a chart

Adobe reports revenue through three distinct operating segments: Digital Media, Digital Experience, and Publishing and Advertising. The largest by annual revenue is Digital Media, which includes the popular Creative Cloud and Document Cloud offerings. Creative Cloud provides a suite of software applications for graphic design, video editing, Web development, photography, and more. Document Cloud enables users to create, edit, sign, and share PDF documents and forms. Both of these units saw a hefty uptick in demand in Q3, resulting in an 11.2% increase in Digital Media revenue to $3.6 billion.

Adobe’s second largest segment by revenue is Digital Experience, which provides a comprehensive platform for businesses to manage their digital presence, customer interactions, and data insights. Digital Experience helps customers create personalized and engaging content, optimize marketing campaigns, and leverage artificial intelligence and machine learning to improve business outcomes. In Q3, Adobe reported a 9.7% rise in Digital Experience revenue to $1.2 billion, driven by higher subscription bookings and customer retention rates.

The third and smallest segment for Adobe is Publishing and Advertising, which includes legacy products and services. In Q3, Adobe reported a 17.3% decline in Publishing and Advertising revenue to $67 million, reflecting the ongoing transition away from its older products. Adobe, in fact, has consistently downplayed this unit in its earnings releases and financial filings over the past several quarters.

The following infographic illustrates Adobe’s path to a record-breaking Q3:

Image source: The Motley Fool.

Bottom line: Adobe achieved a record-breaking total revenue in Q3, driven by strong organic growth in Digital Media and Digital Experience. The company also managed to keep its cost of sales and operating expenses under control, resulting in one of its most profitable quarters ever. Speaking to this point, Adobe reported a net income of $1.4 billion for the three-month period, which qualifies as one of the most profitable quarters in company history.

ADBE Net Income (Quarterly) data by YCharts

Is Adobe’s stock a buy?

Adobe’s record-breaking Q3 earnings release wasn’t a hit with shareholders. The company’s stock price dropped by 4.2% last Friday, the day the report was released. While the company’s conservative Q4 guidance probably played a role, the main culprit behind Adobe’s pullback is probably its lofty valuation.

Adobe’s shares have traded as high as 35 times forward earnings this year, which is markedly higher than its peer group average of 28.1. In other words, investors probably had unrealistic expectations for this stock because of the company’s AI angle.

Nevertheless, this recent dip might be an attractive entry point for long-term investors. Adobe has demonstrated its ability to innovate and grow organically, which bodes well for its share price performance in the years ahead.

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George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe. The Motley Fool recommends the following options: long January 2024 $420 calls on Adobe and short January 2024 $430 calls on Adobe. The Motley Fool has a disclosure policy.

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