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Anyone who invested in Adobe (NASDAQ:ADBE) stock over the last five years is likely disappointed. While the share price hasn’t collapsed, an 8% increase versus the S&P 500‘s 117% is definitely underwhelming. However, while the stock price hasn’t moved much, the underlying business has continued making progress. And subsequently, shares are now trading at around half their historical valuation on a price-to-earnings basis.
So does this mean Adobe’s a screaming buy right now? Let’s take a look at what the experts are saying.
Growth on the horizon
As of May, there are 41 institutional investors closely watching this business. And right now, 28 of these believe Adobe stock is worth buying with an average share price forecast of $490. That’s about 17% higher than current levels and implies a £5,000 investment today would grow into £5,850 by this time next year.
So what’s driving this bullish sentiment? There are a lot of factors at play right now. One that seems to be grabbing a lot of investor attention right now is the group’s foray into artificial intelligence (AI). In September 2023, Adobe commercially launched its Firefly tool – an AI generator for images, videos, audio and vectors.
Since then, Firefly, along with other newly-launched AI tools, have built a recurring revenue stream of $125m as per the latest results. That’s hardly significant in the context of Adobe’s $21.5bn total sales. But AI income’s expected to double in 2025 before surging even higher over the next few years. And with other AI features and tools being integrated across its industry-standard Creative, Document and Experience Cloud suite of tools, the value proposition for customers seems to be on track to rise considerably.
What could go wrong?
Financially speaking, Adobe appears to be in tip-top shape. A 90% gross profit margin is exceedingly rare. And its recurring revenue model paves the way to impressive free cash flow generation that management has been using to invest in R&D as well as buy back shares. In fact, the group’s shares outstanding have declined by almost 10% over the last five years.
However, like all businesses, Adobe has its weak spots. Considering the speed at which companies like Microsoft and Alphabet (Google) have monetised AI tools, Adobe seems to be moving relatively slowly with its own products. The impact of this is only compounded by slowing growth in its flagship Creative Cloud tools.
With free or cheaper alternatives to Photoshop, Illustrator, Premiere Pro and Acrobat, the firm seems to be losing its technological moat. That’s especially so among individual creators and smaller businesses.
Yet one of the most prominent concerns among analysts today is the ongoing legal battle with the US Department of Justice that kicked off in June 2024. Adobe has been accused of deceiving customers by hiding subscription cancellation fees. And it’s said to have been making the entire process deliberately convoluted to prevent customers from leaving.
If the legal battle ends unfavourably, beyond the financial penalties, the reputational damage will likely create fresh opportunities for competitors to steal market share.
With all this in mind, Adobe, while looking relatively cheap, doesn’t tempt me right now. There’s simply too much external uncertainty for my tastes. But should the firm accelerate its AI monetisation and prove its value to customers over free alternatives, I may have to reconsider.
