The share price of American computer software company Adobe (NASDAQ:ADBE) is currently trading nearer year lows and declined over 27% in the past year and is just 1% to 2% higher over the past five years. The fall was kindled by the concerns around AI monetization and a downbeat revenue forecast.
Adobe best known to the public for its documents but in fact has three segments, digital media, digital experience, publishing, and advertising so whether it’s an individual, team, or enterprise they can create, publish, and promote content.
With AI still so nascent, the burgeoning question is whether and how Adobe can leverage it, and if so is the stock on sale at the moment?
AI Tools Driving Growth
Companies across all industries are the major beneficiaries of AI technology. Disruptive innovation has offered aids like automation of repetitive tasks, faster insight from data, fewer human errors, enhanced decision-making, and reduced physical risks to companies.
According to Statista, the global AI market is projected to reach $244.22 billion in 2025, and the United States will rank as the largest market at $73.98 billion in market size. Further, the market is expected to grow at a CAGR of 26.6%, resulting in a market value of $1.01 trillion by 2031.
AI is essentially a creative innovation and hence has liberated various imaginative and creativity-associated segments like designing, visual content creation, and much more. Entities are actively hopping on the AI bandwagon and streamlining and enhance various design processes.
With the wind at its back so to speak, the AI-powered design tools market is forecasted to grow to $15.06 billion by 2029 at a CAGR of 22.1%, thanks to personalized customer demand, cloud-based solutions, integration with augmented reality, as well as virtual reality.
Adobe’s Strategies to Leverage AI
Adobe is not untouched by the ongoing reorganizations brought in by AI. The company has been steadily adopting and inculcating the technology in its offerings and platforms. Adobe has also added various partnerships, such as exploring AI perks from all dimensions and sharing them with its clients and customers spread across the world.
In the recently reported quarter, Adobe’s annualized recurring revenue from AI contributed around $125 million, and the company expects to report a significantly higher value by the end of the fiscal year. A closer observer of the stock, Bernstein’s Mark Moerdler, mentioned in his report that he believes that “ADBE is an AI winner and that AI is not replacing existing revenue streams, investors need to be able to observe longer-term trends.”
Adobe took a step towards AI with its new Adobe Experience Platform Agent Orchestrator to help businesses manage AI agents across Adobe and third-party ecosystems.
Also, its Generative Extend in Premiere Pro is another innovation that will take its current portfolio to another level. New AI innovation can generate and expand the length of video and audio clips with the use of AI, and AI-powered Media Intelligence can quickly search for specific clips in terabytes of footage in seconds.
Other notable innovations from the company include the new Firefly application and the availability of Photoshop on mobile phones for ease and advancement.
Adobe’s Impressive Financial Reports
In the first quarter of fiscal year 2025, Adobe reported revenue of $5.71 billion, reflecting growth of 10% from the prior year’s quarter revenue of $5.18 billion. The reported revenue also surpassed the LSEG analysts’ estimates of $5.66 billion in revenue.
Non-GAAP net income of $2.22 billion in the first quarter also went up 8.7% year-over-year from $2.05 billion. Also, the company’s earnings per share were in line with the top-line trends as it surpassed the $4.97 consensus estimate and recorded an adjusted EPS of $5.08. The EPS was 13.4% higher than the previous year’s period EPS of $4.48.
Cash flow from operations essentially 2x’ed year-over-year from $1.17 billion in the first quarter of 2024 to $2.48 billion in Q1, and led to the repurchase of nearly 7 million shares during the quarter. First-quarter revenue, operating income, and net income were all at record levels.
Also, the company’s cutting-edge technology and strategies could further stimulate its operations, powering its market position and financial results.
Is Adobe Stock a Bargain Right Now?
Adobe is trading at a discount to fair value with upside to $489 per share according to 34 analysts. The management team has been buying back shares with serious aggression, and yet the low price-to-earnings ratio relative to earnings growth makes it attractive.
The decades-old Adobe has stayed with its clients from the times of Macintosh to advanced iPads and not even AI. All these years, Adobe has sustained its ability to transform quickly and adopt new advancements.
Adobe also showed the same agility when the world stumbled upon the disruptive technology of AI. While a segment of the users is still in a tiff on whether AI is a blessing or a curse, Adobe tuned it to its benefit and has been designing innovative platforms and solutions for its customers.
On the financial front, the company is also performing quite well, with continuously growing revenues and a strong cash position. Its recent share purchase should also allow it to deliver better outcomes for the shareholders. Further, the company is currently trading at 6.95x sales and 22.67x earnings.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
