Adobe is one of several that have moved up lately due to investor enthusiasm for artificial intelligence (AI) products. While the shares look expensive in relation to earnings, we still like the company’s long-term prospects.
In fact, the company is a #1 Power Buy for 2024. The recent dip represents a buying opportunity as both revenue and earnings continue to show strength.
Meanwhile, the stock trades at 26.9 times the company’s 2024 earnings forecast.
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ADOBE INC. (Nasdaq symbol ADBE; www.adobe.com) makes software that lets computer users create, edit and share documents in the popular PDF format. It also makes a variety of electronic-publishing programs.
The Digital Media segment’s software includes Adobe Photoshop and Adobe InDesign. The Digital Experience segment provides analytics, social marketing, targeting, media optimization, and cross-channel campaign management software. It also offers premium video delivery. The Publishing segment produces software that lets computer users create, edit and share documents in the popular PDF format. It offers software to develop web applications.
This technology stock was up sharply in 2023—and we think it will keep moving toward the all-time high of $700 it hit in late 2021. But while the company now looks more expensive in relation to projected earnings and sales, we feel its strong position in key markets and its high R&D spending will continue to give it a competitive advantage and push its shares even higher.
The company is now adding artificial intelligence (AI) technology to Photoshop—its flagship software for editing images—to enhance its capabilities.
For instance, one new feature, called “Generative Fill,” lets users extend the boundaries of cropped images with additional, AI-generated images. The feature can, for example, take a picture of a single flower and turn it into a field of flowers with a mountain range behind it.
Growth Stocks: Revenue and earnings rise strongly to enhance a strong balance sheet for Adobe
Due to opposition from U.K. and European regulators, Adobe recently cancelled its planned $20-billion cash-and-stock acquisition of collaboration-software maker Figma. As a result, Adobe paid Figma a $1 billion termination fee.
Meantime, Adobe continues to benefit from its decision a few years ago to switch to selling programs as ongoing subscriptions instead of one-time purchases. For the fiscal 2023 fourth quarter, ended December 1, 2023, revenue rose 11.6%, to a record $5.05 billion from $4.53 billion a year earlier. Earnings rose 18.6%, to $4.27 a share from $3.60.
The company’s balance sheet is also very strong: Adobe holds cash of $7.8 billion.
The stock trades at a high, but still acceptable, 26.9 times the $17.95 a share that the company should earn in fiscal 2024. Note—Adobe spends a high 18% of its revenue on research, which strengthens its future growth but hurts its current earnings and inflates its p/e ratio.
Recommendation in Wall Street Stock Forecaster: Adobe Inc. is a buy.
