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Adobe Down 6% in a Month: Should You Buy the Dip in ADBE Stock?

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Adobe (ADBE - Free Report) shares have declined 6.1% in a month, underperforming the broader Zacks Computer & Technology sector’s return of 2.5% and the Zacks Computer Software industry’s appreciation of 0.2%. 

ADBE suffers from a challenging macroeconomic environment, ongoing tensions between Russia and Ukraine that have negatively impacted the Digital Media segment and intensifying competition in the generative AI (Gen AI) space.

However, Adobe is benefiting from a strong demand for its creative products. Its Creative Cloud, Document Cloud and Adobe Experience Cloud products have been driving top-line growth.

ADBE’s strong positioning in the digital content and marketing industry, backed by its robust cloud-enabled products and growing GenAI capabilities, has been boosting its business prospects.

Rising subscription revenues and solid momentum across the mobile apps are major positives. Growth in emerging markets and robust online video creation demand remain tailwinds for Adobe.

For the fourth quarter of 2024, Adobe expects net new Annual Recurring Revenues in the Digital Media segment to be $550 million. Subscription revenues of Digital Experience are anticipated between $1.23 billion and $1.25 billion.

One Month Performance

 

Zacks Investment Research
Image Source: Zacks Investment Research

 

Expanding GenAI-Powered Portfolio Aids ADBE’s Prospects

Adobe is riding on the solid momentum in its family of creative, Gen AI models, namely Firefly. It has been used to generate 13 billion images since March 2023 and is seeing rapid adoption by leading brands and enterprises.

Its unveiling of the Firefly Image 2 Model, Firefly Vector Model and Firefly Design Model to mark a significant advancement in its creative Gen AI model family, enhancing creative control, image quality and illustrator capabilities, is a major positive.

Adobe recently introduced the new Firefly Video model, which is a positive. With Firefly innovations and integrations, ADBE has exceeded 12 billion generations since the launch of Firefly. This is marked as an important milestone.

Enhanced AI Assistant to Boost ADBE’s Competitiveness

Adobe enhanced features of Acrobat AI Assistant to allow customers to ask questions, get insights, and create content from information across groups of PDFs and other document types, including Microsoft (MSFT - Free Report) Word, PowerPoint and text files. It also introduced enhanced meeting transcript capabilities in AI Assistant.

Adobe’s growing efforts to expand content creation in Adobe Acrobat are noteworthy. It integrated Adobe Firefly image generation into its Edit PDF workflows. It has optimized AI Assistant in Acrobat to generate content fit for presentations, emails and other forms of communication. 

Adobe also offers the Adobe Express Platform AI Assistant, which is capable of answering technical questions, automating tasks, simulating outcomes and generating audiences seamlessly.

The launch of Generative Remove in Adobe Lightroom, a powerful Firefly-backed tool that helps remove unwanted objects from any photo in a single click in a non-destructive manner, is a plus.

The introduction of Adobe Express for Enterprise, powered by Firefly Image Model 3, is driving the company’s momentum among various enterprises.

Strong Clientele Drives ADBE’s Growth

A solid portfolio and differentiated approach to AI are attracting an expanding universe of customers across Adobe’s segments.

International Business Machines (IBM - Free Report) is one of the notable customers leveraging Adobe Firefly. 

Adobe’s other key customer wins include Johnson & Johnson, Mayo Clinic, Home Depot, Dentsu, TD Bank, Newell Brands, Alphabet’s (GOOGL - Free Report) Google, MediaMonks, Meta Platforms, U.S. Navy, PepsiCo, Estee Lauder, Disney, RedBull, Amazon, KPMG, U.S. Treasury Department and Charles Schwab.

ADBE’s 2024 Estimate Revision Trend Positive

For the fourth quarter of fiscal 2024, Adobe projects total revenues between $5.50 billion and $5.55 billion. 

Adobe expects Digital Media revenues between $4.09 billion and $4.12 billion. The Digital Experience segment’s revenues are expected between $1.36 billion and $1.38 billion.

Adobe expects non-GAAP earnings between $4.63 per share and $4.68 per share.

The Zacks Consensus Estimate for fourth-quarter fiscal 2024 is currently pegged at $4.66 per share, unchanged over the past 30 days.
 

Adobe Inc. Price and Consensus

Adobe Inc. Price and Consensus

Adobe Inc. price-consensus-chart | Adobe Inc. Quote

 

For 2024, the consensus mark for earnings is pegged at $18.28 per share, up by a penny over the past 30 days.

ADBE Stock Trades at a Premium

However, Adobe stock is not so cheap, as the Value Score of D suggests a stretched valuation at this moment.

In terms of the forward 12-month Price/Sales ratio, ADBE is trading at 9.04X, higher than the industry’s 7.75X.

Price/Sales Ratio (F12M)

 

Zacks Investment Research
Image Source: Zacks Investment Research

 

Conclusion

Adobe’s deepening GenAI focus, and innovative GenAI-powered portfolio presents a compelling opportunity for investors. We believe ADBE’s strong growth prospect justifies its premium valuation.

OKTA currently has a Zacks Rank #2 (Buy), which implies that investors should start accumulating the stock right now. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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