We recently published a list of 10 Biggest AI Stories and Ratings Updates You Should Not Miss This Week. Since Adobe Inc (NYSE:ADBE) ranks 8th on the list, it deserves a deeper look.
The Federal Reserve now expects just one rate cut in this year, and the market’s reaction to this development has been calmer-than-expected, showing investors are now paying little to no attention to what the Fed does and instead have their eyes focused on AI, which continues to push the markets higher. Tech companies, small and large, are continuing to roll out AI-focused products and solutions, while funds are pouring billions into AI. SoftBank has recently committed another $5 billion in AI investments for 5 companies ($1 billion each). A Wall Street Journal report cited SoftBank’s CFO, who said the bank’s chief Masayoshi Son was taking a “break from quarterly earnings meetings so he could focus on AI.”
In this backdrop it’s important to stay ahead of the curve and see what’s happening in the AI space.
In this article we will take a look at some of the biggest AI stock ratings updates and stories which can’t be missed. We focused on AI stocks that are popular among the smart money investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Copyright: photogearch / 123RF Stock Photo
Adobe Inc (NYSE:ADBE)
Number of Hedge Fund Investors: 108
Adobe shares are rising on Friday after the company crushed past analyst estimates for Q2, putting an end to skeptics’ narrative which said the company’s editing tools were under threat from the generative AI revolution. JPMorgan upgraded the stock to Overweight from Neutral after the Q2 results and upped its price target to $580 from $570.
Previously, the stock suffered as several analysts voiced their doubts around Adobe’s growth in the AI era. Melius Research recently downgraded Adobe Inc (NYSE:ADBE) stock to Hold from Buy with a $510 price target, citing broader issues the enterprise software industry is experiencing when it comes to AI. Melius analyst Ben Reitzes said these issues are similar to the ones on-premise hardware companies experienced following the rise of Cloud computing. The analyst also said that AI is making it easier for smaller companies to develop and deploy tools, increasing competition to bigger players in the industry.
Adobe Inc (NYSE:ADBE) shares have lost about 20% so far this year. The notion that the rise of generative AI tools would give a tough competition to Adobe Inc’s (NYSE:ADBE) design tools is weighing down the stock. Adobe Inc’s (NYSE:ADBE) revenue in the first quarter jumped 11% YoY to $5.18 billion, narrowly beating the Street estimate of $5.1 billion. As of the end of the first quarter of 2024, Adobe Inc (NYSE:ADBE) had $17.58 billion in remaining performance obligations (‘RPOs’), representing 16% YoY growth. RPOs is an indicator of future revenue growth as it represents the sum of invoiced amount and the future amounts not yet invoiced for a contract with a customer.
Adobe Inc (NYSE:ADBE) management sensed the worries among investors stemming from fears the generative AI boom would cut the demand of Adobe products. Adobe Inc’s (NYSE:ADBE) management believes the AI boom would only increase the need of its editing tools since text-to-image content cannot be used in isolation and needs editing. Here’s the management’s take on why it believes Adobe Inc (NYSE:ADBE) has no threats in the AI arms race:
“Every creator and business is focused on building their brand and engaging with their audiences through standout content. Creative Cloud remains the solution of choice for the world’s creators, whether their medium is design, photography, video, illustration or 3D. Adobe Express is inspiring millions of users of all skill levels to design more quickly and easily than ever before. In the year since we announced and released Adobe Firefly, our creative generative AI model, we have aggressively integrated this functionality into both our Creative Cloud flagship applications and more recently, Adobe Express, delighting millions of users who have generated over $6.5 billion assets to date. In addition to creating proprietary foundation models, Firefly includes a web-based interface for ideation and rapid prototyping, which has seen tremendous adoption.
We also recently introduced Firefly Services, an AI platform which enables every enterprise to embed and extend our technology into their creative, production and marketing workflows.”
Read the full earnings call transcript here.
Whether or not the management’s thesis pans out is something only time would tell. While there are risks involved, Adobe Inc’s (NYSE:ADBE) current valuation is attractive. The stock has a forward P/E of 25.83, close to the sector median of 23.68. Revenue growth in 2025 is expected to come in at 11% while EPS growth estimate set by Wall Street for Adobe Inc (NYSE:ADBE) is 13.00%.Average analyst price target for Adobe Inc (NYSE:ADBE) is $611.15, which represents a 33% upside potential from the current levels.
RiverPark Large Growth Fund stated the following regarding Adobe Inc. (NASDAQ:ADBE) in its first quarter 2024 investor letter:
“Adobe Inc. (NASDAQ:ADBE): ADBE was our last top detractor in the quarter following OpenAI’s announcement of an AI-based text-to-video offering called Sora. Some investors seem to believe that AI and the Sora product specifically pose an existential threat to Adobe’s Creative Cloud Suite. We do not share these concerns and believe that AI is a tremendous growth opportunity for Adobe. In fact, in a recent conference call, management described how innovative AI-based solutions are expected to be drivers of growth across its product lines.
ADBE is the leading software and solutions provider in the content creation and content management space. The company offers a line of products and services used by creative professionals, communicators, businesses of all sizes, and consumers for creating, managing, delivering, measuring and optimizing content and experiences across personal computers, smartphones, other electronic devices and digital media formats. The company has grown revenue in the double-digit percent range for the last decade, and as it enters its 42nd year since its founding, we expect ADBE to continue to grow revenue greater than 10% per year through 2028. The company generates 40% EBITDA margins, which we think can expand to nearly 50%, and we believe the company will more than double last year’s roughly $7 billion of free cash flow over the next five years.”
Overall, Adobe Inc (NYSE:ADBE) ranks 8th on Insider Monkey’s list titled 10 Biggest AI Stories and Ratings Updates You Should Not Miss This Week. While we acknowledge the potential of Adobe, our conviction lies in the belief that under the radar AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ADBE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Michael Burry Is Selling These Stocks and Jim Cramer is Recommending These Stocks.
Disclosure: None. This article is originally published at Insider Monkey.