By Investors are punishing Adobe Inc (NASDAQ: ADBE) this morning after its management issued weaker-than-expected guidance for the full year – making them question how well the company is positioned amidst the rising competition in the AI space.
Shares of the software giant are down about 12% at writing.
Adobe expects a deceleration in its annual recurring revenue and some contraction in its operating margin as well.
Still, there’s reason to consider loading up on Adobe stock following today’s sell-off.
Adobe stock is now trading at a discount
Adobe is choosing to be conservative at a time when the majority of AI companies are setting pompous ambitions for the future.
Naturally, that would concern investors.
However, it’s the valuation that keeps Adobe stock attractive on a relative basis.
Adobe forecasts its adjusted per-share earnings to fall between $20.20 and $20.50 in fiscal 2025 and its stock is currently going for $485.
That puts a forward price-to-earnings multiple of about 24 on ADBE.
In comparison, the average forward P/E multiple for the software industry currently sits at 32 – that suggests Adobe shares are trading at a significant discount.
So, the bad news may already be priced into Adobe stock that’s now down well over 20% versus its year-to-date high in early February.
Adobe may be playing the long game in AI monetisation
Adobe has been criticised for being too slow in monetising artificial intelligence – but all it’s really doing is prioritising adoption.
Adobe is committed to expanding its user base with free offerings before introducing monetisation strategies.
The company wants its users to be habitual in terms of using its AI tools before it makes them pay for them.
While such a strategy may not mean much for Adobe shares in the near-term, they could help unlock significant upside over the long-term.
So, Adobe is not being slow – it’s just playing the long game when it comes to monetising artificial intelligence.
Although, a dividend would have made it easier for investors to wait for the company’s efforts to pay off.
AI may boost Adobe’s profitability in 2025
Finally, it’s not like Adobe is not generating any revenue from AI.
Some of its efforts, including the AI Assistant in Acrobat and GenStudio aimed at enterprise clients are already gaining traction and adding to the topline.
Plus, Firefly has seen more than 13 billion image creations since its launch, as per Rob Sechan – the chief executive of NewEdge Wealth.
Seechan remains bullish on Adobe stock as “it’s got industry-leading text-to-video, text-to-image creation capabilities. Ultimately, that will continue to increase profitability,” he told CNBC in a recent interview.
That may be part of the reason why CEO Shantanu Narayen dubbed 2024 a “great year” and sees the company as well-positioned for another “great year ahead”. Note that Adobe stock is trading above a key support at writing.
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