Adobe is well-positioned to be a market leader in the new age of AI-infused creativity.
Adobe (ADBE 0.68%) shares shot up 14.5% last Friday after the company reported strong second-quarter results and boosted its full-year 2024 guidance. Adobe had been one of the poorer-performing stocks in the S&P 500 index. And even after Friday’s gain, it is still down 12% in 2024.
Here’s why Adobe could be turning the corner and why the growth stock is worth buying now.
Image source: Getty Images.
A new narrative
Adobe stock sold off heavily in March after its first-quarter earnings and full-year guidance disappointed investors. The main issue was that Adobe’s AI investments weren’t paying off, at least in the short term.
AI investments have the potential to improve products, grow the user base and subscription numbers, and justify future price increases. But if consumers shrug off new product features, the narrative quickly flips, and the spending looks excessive or wasteful.
This quarter, Adobe flipped the script and proved it can be a steady grower in the AI age.
|
Metric |
Q2 Fiscal 2024 |
Q2 Fiscal 2023 |
|---|---|---|
|
Gross profit (in billions) |
$4.711 |
$4.244 |
|
Research and development (in millions) |
$984 |
$876 |
|
Sales and marketing (in billions) |
$1.445 |
$1.345 |
|
General and administrative (in millions) |
$355 |
$357 |
|
Amortization of intangibles (in millions) |
$42 |
$42 |
|
Total operating expenses (in billions) |
$2.826 |
$2.62 |
|
Operating income (in billions) |
$1.885 |
$1.624 |
Data source: Adobe.
Expenses were up across the board. But gross profit shot up 11%, outpacing a 7.9% increase in operating expenses, leading to an operating income increase of 16.1%.
Better yet, Adobe raised its full-year revenue guidance to $21.4 billion-$21.5 billion and non-GAAP earnings-per-share guidance to $18-$18.20. Based on a stock price of $525 and fiscal 2024 expected earnings, Adobe would have a non-GAAP price-to-earnings ratio of just 25.3 — an inexpensive price for a top-tier growth stock.
AI-fueled product improvements and new tools
Adobe released its subscription suite of applications called Creative Cloud in 2012. It has made plenty of improvements since then. But the company has arguably been in an innovation rut in recent years.
To overcome this growth slowdown, Adobe tried to buy Figma for $20 billion — a deal that was heavily scrutinized for its high price tag. Adobe has also been challenged by competitors like Australia-based Canva — a cheaper alternative to the Adobe product suite.
Generative AI has been a breath of fresh air for Adobe. The company has implemented AI functionality across its flagship products, like Photoshop, Illustrator, Lightroom, and Premiere. Adobe Firefly was launched in March 2023. Since then, the generative AI tool has helped users produce over 9 billion images across Adobe tools.
Adobe Acrobat and Reader AI Assistant is a subscription add-on that helps users navigate and edit PDFs. For example, it can summarize documents and answer questions, which can save time and help users accomplish tasks faster. The tool has been a big hit, as Adobe’s Document Cloud revenue surged 19% year over year on a constant currency basis.
Adobe launched Adobe Express earlier this year — an application for quick editing effects. It leverages generative AI and is useful for short-form video content like Instagram Reels and TikTok, as well as improving resumes, banners, logos, etc. Adobe launched an Express app for iOS and Android earlier in its second quarter and said that adoption is strong.
Adobe is packed with potential
Despite its run-up on Friday, Adobe remains an underrated AI stock. It has a market-leading position and a broad customer base, including individuals, students, and enterprises.
The business-to-business sales pipeline offers the greatest potential for Adobe’s recent product improvements and new developments. Sometimes, it can be difficult to justify a higher cost to an individual or student. But the business case is more clear-cut. Suppose upgrades enhance Adobe’s product offerings and save its enterprise customers money. In that case, it stands to reason that companies would be willing to pay up for subscription add-ons or general price increases.
Investors should monitor Adobe’s spending and make sure it is translating to growing the top and bottom lines. Adobe’s growth has been good, but it could accelerate as adoption matures over the next few years. Given its potential and attractive valuation, Adobe is a great AI play in the software space.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe and Meta Platforms. The Motley Fool has a disclosure policy.