Adobe Inc ( ADBE ) surpassed both top and bottom-line estimates, but shares tumbled 14% on Friday due to a weaker than expected sales outlook. This is Adobe's biggest slump since 2022. The news also pulled down the stock of its industry peer Microsoft Corporation ( MSFT ) . The design software company is benefiting from the AI hype, but this technological development is also fueling its competitors. Moreover, the lackluster outlook is fueling concerns regarding the health of its Creative Cloud as well as its slower-than-expected pace of AI monetization.

Fiscal First Quarter Highlights

For the quarter that ended on March 1st, Adobe reported revenue rose 11% to $5.18 billion, barely surpassing Wall Street's estimate of $5.14 billion. The digital media unit that is home to the company's flagship offerings recorded a revenue growth of 12% as sales reached $3.82 billion. As for revenue from the marketing and analytics software division, it recorded a 10% growth as sales amounted to $1.29 billion. Adjusted earnings per share amounted to $4.48, topping estimates of $4.38.

Fiscal second quarter outlook came short of estimates.

Adobe guided for revenue between $5.25 billion and $5.30 billion, which is below the Bloomberg-gathered consensus estimate of $5.31 billion.

Adobe's throne could be threatened by AI competitors.

For the first time in its history, the longtime leader in software for creative arts professionals could be threatened by generative AI-based startups that are going after its market. In response to the rising competition, Adobe has integrated its proprietary AI model, Firefly, into its top offerings, including the Photoshop and Illustrator. Although Adobe already started to monetize the added AI features, it will intensify these efforts in the second half of the year.

But a recent demonstration from the Microsoft ( MSFT )-backed OpenAI of its video-generation model, Sora, reignited these concerns. With this new machine-learning tool that transforms text prompts into detailed video, Microsoft ( MSFT ) and Open AI showed serious sci-fi potential. The text-to-video AI generator that Microsoft ( MSFT )-backed Open AI presented is impressive, to say the least, so no wonder that Sora is considered to be the next ChatGPT-like milestone for AI development. This spooked Adobe's investors, especially since it became obvious that Adobe's AI story will take time. By being more focused on supporting the adoption of AI tools and infusing this technology throughout its offerings, Adobe 'sacrificed' the monetization timeline of AI features and got punished for it. By the looks of it, generative AI is threatening Adobe's unique business model that has been doing a great job at keeping its competitors at bay.

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