Adobe Just Reported Earnings. Here's What Investors Need to Know.

The stock market's "show-me" mentality for artificial intelligence stocks -- rewarding companies with tangible results and punishing those that are heavy on expectation and promise -- claimed another victim Thursday.

Adobe (NASDAQ:ADBE) reported earnings after the close on Sept. 10, emphasizing user acquisition over its paid products. On top of that, fourth-quarter guidance fell short of analysts' expectations, sending the stock down nearly 5% in after-hours trading.

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Adobe has managed to recover its losses on Friday morning and pull even. But investors are signaling their skepticism for Adobe stock even though it's showing strong growth in its AI products.

Adobe is best known for its Creative Cloud suite of software, including Photoshop, Illustrator, and Premiere Pro. It's been tremendously popular with graphic artists and digital media professionals, and Adobe monetized the software through a subscription model.

But that was before the days of generative AI. Now, someone using one of the powerful AI engines such as ChatGPT, Claude, Grok, or Gemini can merely enter a prompt and, within seconds, receive an altered image or entirely new content.

Adobe's answer to this has been Adobe Firefly, its generative AI model that lets users interact with Photoshop and other products via text prompts. And it has embraced a freemium model that lets users use many of its products and AI features. That helps users new to Adobe try out its powerful software and get used to the ecosystem before they encounter paid features and higher usage limits.

Anil Chakravarthy, president of Adobe's customer experience orchestration business, who will become CEO on Dec. 1, discussed the strategy during the company's earnings call .

"One of the things we have obviously done is, for example, taken a portion of our traffic to make sure that we are sending them to the right place so we can acquire customers for, through the freemium funnel," he said. "And then we engage them and then increase the intensity of their use. And, obviously, at the right time, we will calibrate where we convert them into ARR (annualized recurring revenue). So that is the approach we have taken to make sure that we are really tapping into this large base of next-generation creators we can bring into the Adobe family."