In three weeks’ time, Adobe Inc. (ADBE) is set to showcase its earnings report for the fourth quarter, and the overall sentiment is positive. The company, founded in 1982, has evolved significantly over the decades, transforming from a company known for its PostScript printer language to a leader in creative software. Even up until 15 years ago, serious editors didn’t consider its Premiere Pro editing software to be more than a product for amateurs. How things have changed.
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Adobe has expanded its product portfolio in recent years, gaining substantial market share from competitors. It has created a holistic ecosystem with Its Creative Cloud suite, launched in 2012. It marked a significant power shift in the editing and design industry, grabbing the glory of established software companies such as Avid and Final Cut Pro. Adobe’s move to a subscription-based model drove consistent growth and solidified its dominance in the industry.
Nevertheless, one can never rest on one’s laurels, and in recent years, the emergence of AI has worried investors and users about the software’s future. If anyone with no design knowledge can create a captivating image, logo, or video just by describing their needs, then Adobe’s software seems irrelevant going forward.
However, as Ray Kurzweil, the known futurist and inventor, predicted that in order to avoid technology overcoming humanity, humans would merge with technology, which he phrased as “The Singularity,” so did Adobe; it merged AI into its software, and its costumers reacted with great enthusiasm. From 22 million active subscribers in 2020, Adobe has reached 33 million in 2023 and is destined to reach up to 35 million in 2024.
Although ADBE stock has declined over 16% year-to-date, the company continues to show solid EPS and revenue, surpassing estimates in the last nine quarters.
You can read what our writer at Tipranks, Bernard Zambonin, says about Adobe here. Now, let’s review three reasons why ADBE stock fortunes look promising:
- AI Integration into Its Software: As mentioned above, Adobe has been integrating AI into its products, particularly with the introduction of Firefly, a suite of generative AI tools. These tools, such as Generative Fill in Photoshop and Generative Recolor in Illustrator, have enhanced productivity and creativity, leading to record demand for Adobe’s creative suite. The company’s focus on AI was further highlighted at Adobe MAX 2024, where new features were unveiled, reinforcing its leadership in creative software.
- Sound Business Model and Revenue Growth: Despite concerns that AI advancements could disrupt Adobe’s business model, the company’s performance tells a different story. In its latest Q3 report, Adobe achieved 11% year-over-year revenue growth, driven by strong demand across Creative Cloud, Document Cloud, and Experience Cloud. This growth has been fueled by the widespread adoption of AI-powered features, indicating that AI is enhancing rather than replacing the work of creators and editors.
- Valuation and Earnings Growth: Adobe’s valuation appears relatively cheap, with the stock trading at its August 2020 levels despite consistent double-digit EPS growth. For Fiscal 2024, analysts’ estimates point to an EPS of $18.27, representing a growth rate of 13.7%, with momentum expected to continue into Fiscal 2025. This lasting EPS growth against a stagnant share price has led to Adobe trading at one of its lowest forward valuations, a not-too-bad entry point for potential investors.
ADBE’s Price Target on Wall Street
On Wall Street, ADBE stock is a Moderate Buy, based on 23 Buys, five Holds, and two Sells. The average price target for ADBE stock is $624.07, signaling an upside of 24.91%.
Conclusion
Not long ago, Adobe wasn’t the first choice for professional editors. However, the tide has turned, and the company has created one of the most successful platforms for video and image designers. Despite Adobe’s stock fluctuating in the last year, the company has a strong user base and sound monthly revenue. Its software delivers a holistic ecosystem with every solution available for its users. At first, the emergence of AI worried investors, but its implementation in its offerings has enhanced its capabilities instead of derailing the company’s prospects. The company’s user base gradually grew, and its valuation dropped to 2020 levels. Now, we wait for its earnings report to see whether the company will keep its recent tradition of surpassing consensus estimates.
