We recently published a list of Hedge Funds are Buying and Selling These 10 AI Stocks. Since Adobe Inc (NASDAQ:ADBE) ranks 7th on the list, it deserves a deeper look.
The AI-led rally in the stock market is expected to ripple through other sectors and smaller tech companies, but analysts believe for now large-cap companies are still the key focus of money managers. Morgan Stanley in its August key themes report said that while small-cap stocks rebounded on rate-cut hopes, the window for their outperformance is “too narrow.”
“Historically small cap outperformance depended primarily on economic growth acceleration. Greater risk exposure to a “higher-for-longer” rate environment has added inverse rate correlation to the mix. While periods of growth acceleration with lower rates are plausible (e.g. end-2023), we see this combination as relatively unlikely in the current inflation environment. The recent decline in interest rates was a tailwind to small cap stocks, but softer economic data likely limits the durability of this trade,” the firm said.
The latest earnings season showed that ROI on the huge AI spending by major companies is small in the short term, but long-term gains seem promising. Many companies have already started seeing monetization on their AI investments. Goldman Sachs analysts Joseph Briggs, Kash Rangan, and Eric Sheridan said in a June report titled GEN AI: TOO MUCH SPEND, TOO LITTLE BENEFIT? that they remain more optimistic about AI’s economic potential even if we don’t see immediate benefits for now.
Hedge funds are one step ahead of average individual investors due to the sheer scale of resources and capital they have. That’s why it’s always interesting to see which stocks they are buying and selling. In this article we take a look at the 10 most important AI stocks which were on the radar of elite money managers based on their second-quarter filings. 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)
Total Number of Hedge Fund Investors as of the End of Q2: 107
Total Number of Hedge Fund Investors as of the End of Q1: 108
Billionaire Stanley Druckenmiller opened a new stake in Adobe Inc (NASDAQ:ADBE) during the second quarter, worth about $20.4 million.
Adobe has crushed all market fears around generative AI potentially denting the demand for company products. Some believed the rise of generative AI tools would dampen the demand for Adobe’s tools since everyone can now just give simple text-based commands to AI to make images and edit videos. But Adobe turned the tables around and used AI to its advantage. Adobe Inc (NASDAQ:ADBE) Digital Experience segment is integrating AI tools to enhance its tools and deliver AI-driven features for automation and personalization, catering to marketers, advertisers, ad agencies, publishers, and business executives. Through Adobe Experience Cloud, it offers solutions for B2B marketing and content creation.
A new addition to this segment is Adobe GenStudio, a generative AI product designed for marketing. It creates AI-generated images and supports content planning and management. Despite its content creation features, Adobe Inc (NASDAQ:ADBE) classified GenStudio under Digital Experience due to its primary focus on marketing applications.
After the Q2 results more Wall Street analysts think Adobe is in a position to use the generative AI revolution to its advantage. For the third quarter, the company expects $5.38 billion in revenue for Q3, marking a 12.1% year-over-year growth and signaling sequential acceleration.
Growth at Adobe Inc (NASDAQ:ADBE) is aided by AI products like Firefly, which has not only attracted new users but also boosted retention rates.
JPMorgan has upgraded Adobe Inc (NASDAQ:ADBE) to Overweight from Neutral and raised its price target to $580 from $570. Analysts believe the stock has significant upside potential and is poised to recover to its previous highs, potentially outperforming the broader market. They think current investor concerns, particularly around the Firefly product, might be overblown, and that monetization could start to improve in the latter half of this year and into the next.
Polen Global Growth Strategy stated the following regarding Adobe Inc. (NASDAQ:ADBE) in its Q2 2024 investor letter:
“With Adobe Inc. (NASDAQ:ADBE), in some ways, we see it as a microcosm of the market’s “shoot first, ask questions later” approach to categorizing AI winners and losers. In the early part of last year, Adobe came under pressure with a perception that generative AI (GenAI) would represent a material headwind to their suite of creative offerings. In short order, the company introduced its GenAI offering, Firefly, which shifted the narrative to Adobe as a beneficiary with a real opportunity to monetize GenAI in the near term. Earlier this year, that narrative was again challenged as the company reported a slight slowdown in revenue growth. Results in the most recent quarter were robust as the company raised its full-year forecast across a number of key metrics and showcased better-than-expected results.”
Overall, Adobe Inc (NASDAQ:ADBE) ranks 7th on Insider Monkey’s list titled Hedge Funds are Buying and Selling These 10 AI Stocks. While we acknowledge the Adobe Inc (NASDAQ: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.