Here, artificial intelligence (AI) growth stocks are down 24%. I just added it to my portfolio.
Although short-term difficulties have pushed the stock down, its long-term prospects remain bright.
Often there will be huge selling of stocks in the market, and it is important to recognize whether the selling is a buying opportunity or a warning to investors.
The market may sell a stock because operations are deteriorating, competition is eroding market share, or any number of other legitimate reasons. But sometimes the market places far more weight on a company’s short-term challenges than its positive long-term prospects. And this could be a great opportunity for investors.
adobe (ADBE 0.68%) This is one of the companies whose stock price has recently fallen. We are developing innovative solutions and capabilities using generative artificial intelligence (AI) to support further growth of our market-leading software suite. Even though the market sent the stock higher after a strong second-quarter earnings report and improved outlook, the stock is still down 24% from its all-time high at the end of 2021. There are still opportunities for investors to buy stocks today. .
Image source: Getty Images.
Inject generative AI into every task
Adobe is a market leader in enterprise-level content creation software (Photoshop, Lightroom, Illustrator) and document management (Acrobat, Acrobat Sign), as well as marketing and advertising solutions.
Creative Cloud and Document Cloud subscriptions provide a reliable, recurring revenue stream. The software suite is industry standard, so it has two advantages:
There is a network effect where people in the industry need Adobe software to interact with each other because everyone else is using the Adobe file format. Designers send Adobe files to clients or other designers. Without Adobe software, you may not be able to interact with your designs as intended.
The second factor is that Adobe’s software becomes very sticky. No manager is willing to risk switching software suites just to save a few dollars. Workers may need to be retrained and production quality may decline. Freelance designers can pay a subscription fee only when they need Adobe software, but they’re unlikely to leave Adobe forever.
Adobe is using AI to attract more users to its products and increase annual revenue. The generative AI is called Firefly and is trained on Adobe’s proprietary datasets. Supports popular features like Create Fill and Create Expand in Photoshop, Text to Vector in Illustrator, and Remove Objects in Lightroom.
Adobe offers limited use of Firefly features for free to attract new users to its products through its Adobe Express service. Conversion to paying customers was strong, and we saw increased revenue per user and renewals as a result of Firefly.
Last April, we introduced Acrobat AI Assistant, which can summarize documents and answer questions based on the information contained in the documents. Adobe Experience Platform delivers AEP AI Assistant to help marketers automate tasks, simulate outcomes, and generate new audiences to target.
We’re trending in the right direction again.
Management disappointed investors with its first-quarter earnings report. The biggest red flag was slowing average recurring revenue (ARR) growth in the digital media sector. New ARR in the second quarter is expected to be just $440 million.
As mentioned earlier, Adobe’s products are sticky and they are attracting customers with new AI features. Net new ARR for the digital media segment hit $487 million, missing expectations. It also gave a strong forecast of $460 million in net new ARR for the next quarter, or $1.95 billion for the full year.
Management comments on the second quarter earnings call suggest that new AI features are increasing conversion rates for free Express users, increasing revenue per user thanks to premium features, and increasing retention. This bodes well for long-term net growth in ARR.
Thanks to its subscription model, Adobe generates consistent free cash flow every quarter. One-time costs from the failed Figma acquisition weighed on free cash flow last quarter, but it returned to normal levels in the second quarter. The cash will be used to fund a $25 billion share buyback program approved in March. It already bought $2.5 billion in the second quarter.
It’s not too late to buy Adobe stock.
It may not be as good a price as it was earlier this month, but it’s not too late to buy Adobe stock.
Even after the price surge following its second-quarter earnings report, Adobe stock trades at just 25.5 times future earnings estimates. (Some of these estimates may be revised upward after taking into account management’s improved outlook.) This represents a slight premium to the market average for a company that should be able to deliver above-average earnings growth.
Adobe is a software business and is investing heavily in AI development, but as it scales and customers pay more for advanced AI features, it will need to be able to increase its operating margins. The impact of FireFly and AI Assistant will drive significant sales growth by increasing top-funnel interest in your software and increasing conversion rates. Analysts currently expect annual earnings to grow by an average of 22% over the next year, although this may be lower considering management’s revised outlook.
So, it’s not too late to buy Adobe stock even after some recovery.
