We recently published a list of 11 Biggest AI and Tech Stock Analyst Upgrades and Downgrades in July So Far. Since Adobe Inc (NYSE:ADBE) ranks 6th on the list, it deserves a deeper look.
As soon as the latest softer-than-expected inflation data numbers were out, investors began to take profits from major tech stocks and pour money into small-cap companies amid hopes of rate cuts. However, some were quick to call the latest decline in tech stocks the end of the AI-fueled rally that has pushed stock valuations to eye-popping levels. But there are some Wall Street analysts who believe this is just a short-term trend and large tech and AI stocks have a lot of room to grow. Samantha McLemore, CIO of Patient Capital, said while talking to CNBC that the “bull market continues and the path of least resistance is higher.”
The analyst said that she has been in the market for a long time and investors have been worrying about the end of the bull market since 2009, while the S&P 500 has grown over 1000% (17% per year) since then.
“We don’t see any end to the bull market. We do think there’s a good chance we see a rotation and small caps, the laggards, do much better in the second half of the year as the Fed starts to cut rates.”
Some analysts believe the latest decline in tech stocks is yet another opportunity for long-term investors to pile into AI stocks for gains. In this backdrop, we decided to take a look at the top AI stock upgrades and downgrades this month. With each stock, we have mentioned the number of hedge fund 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).
Adobe Inc (NASDAQ:ADBE)
Number of Hedge Fund Investors: 108
Earlier this month Deutsche Bank added Adobe Inc (NASDAQ:ADBE) to its Fresh Money list and gave the stock bullish comments amid AI catalysts.
Deutsche Bank believes the company’s creative cloud division is expected to grow along with generative AI products kicking in.
“We believe this creates an opportunity to see positive estimate revisions along with multiple expansion as the narrative flips to Adobe Inc (NASDAQ:ADBE) once again a gen AI beneficiary.”
The firm raised its price target on the stock to $650.
Mizuho analyst Gregg Moskowitz also said in a fresh note that the “breadth of” AI monetization of Adobe Inc (NASDAQ:ADBE) is being “underappreciated” by the market.
Adobe shares rose after the company posted a strong 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 about Adobe’s growth in the AI era. Melius Research 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 4% so far this year. The notion that the rise of generative AI tools would give tough competition to Adobe Inc’s (NYSE:ADBE) design tools is weighing down the stock.
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.
Alger Focus Equity Fund stated the following regarding Adobe Inc. (NASDAQ:ADBE) in its Q1 2024 investor letter:
“Adobe Inc. (NASDAQ:ADBE) is a diversified software company that provides document and creative software to a wide audience, including creative professionals and enterprises. Its flagship products, such as Photoshop, Acrobat, and Creative Suite, set industry standards like PDF and Flash, supporting a broad range of Adobe applications. As such, we believe Adobe is a primary beneficiary of the digitization (i.e., converting analog information into digital format) spending theme. Recently, the company announced a generative Al (Gen Al) tool called Firefly which is a family of creative GenAl models which will be incorporated into Adobe’s product suite, which can be utilized by consumers and enterprises to potentially save time and effort by automating tasks like image and text generation. We believe Adobe has the potential to leverage Al by integrating software programs into its existing products and enhancing developer Application Programming Interfaces (APIs) to facilitate Al-driven workflows. While the company delivered strong fiscal first quarter operating results, shares detracted from performance after management lowered their fiscal second quarter guidance with Al related growth acceleration being pushed out into the second half of 2024 due to difficult year-over-year pricing comparison. particularly within their creative vertical segment.”
Overall, Adobe Inc (NYSE:ADBE) ranks 6th on Insider Monkey’s list titled 11 Biggest AI and Tech Stock Analyst Upgrades and Downgrades in July So Far. While we acknowledge the potential of Adobe Inc (NYSE:ADBE), our conviction lies in the belief that 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.
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Disclosure: None. This article is originally published at Insider Monkey.
