Shares of Adobe (NASDAQ:ADBE) tumbled recently, thanks in part to the U.S. Department of Justice’s plans to block its $20 billion acquisition of Figma. Despite this, I still view Adobe as a stock that can provide investors with innovation at a reasonable price. I am bullish on Adobe stock.
Adobe Needs to Out-Innovate AI Disruptors
2023 has been all about the rise of artificial intelligence (AI) and its disruptive potential. Even if rates stay higher for longer, the magnitude of disruption from AI innovators is hard to ignore. ChatGPT, Bing, Bard, and text-based AI chatbots may be receiving most of the limelight right now. However, artistic AI software also deserves attention, especially from Adobe investors.
For decades, Adobe has had a sizeable moat surrounding its economic profits in the creative software space. This moat could wither as next-generation AI technologies bring in new tools to help digital creatives who don’t need to be trained in complex platforms such as Adobe Photoshop or Illustrator.
Indeed, it’s quite a stretch to think that today’s slate of early creative AI platforms will replace Photoshop and its like. However, Adobe needs to take the threat of AI seriously to continue building upon its competitive moat in a new era.
It isn’t just AI that could push Adobe to “get creative” with its latest and greatest software updates and offerings. Up-and-comers like Figma and Canva have hit the spot with designers and creatives. With Figma standing to be blocked, Adobe may not be able to rely on M&A to maintain its durable competitive advantage. In short, organic growth is key as regulators look to stop behemoths like Adobe from buying their way back to the growth track.
Some may have doubts that Adobe — a $157 billion behemoth — can continue to innovate and drive growth as competition and AI change the industry. Though I have my concerns, I do think Adobe will rise to the challenge, even without Figma or any other big-ticket purchase. At the end of the day, Adobe has the resources and talent to organically create the next big innovation in the creative space.
CEO Shantanu Narayen is a brilliant manager. Under his leadership, Adobe was able to reap early rewards from its cloud transition. Adobe also made a lateral movement into marketing software, a move that’s helped expand its growth horizons. Of course, Adobe made good use of M&A over the years to help it gain a presence in marketing software, especially in the earlier days of its expansion.
Though markets are more about “what have you done for me lately?” I don’t think it’s wise to discount Narayen’s abilities to weather headwinds, either macro or industry-specific.
Adobe Doesn’t Need Figma to Thrive
The blocking of the Figma deal may be a minor setback, but Adobe is more than capable of moving on. Adobe doesn’t need a pricy acquisition to remain on the cutting edge of UX (user experience) design innovation. The company has been slowly rolling out new features (think automation and collaboration) to make its existing software smarter.
Back on September 15, when Adobe announced its intent to acquire Figma, its stock slipped considerably, likely due to the hefty $20 billion price tag. Undoubtedly, there was quite a bit of sticker shock initially. Now that the deal is potentially off the table, shares slipped again (before eventually recovering a few days later). This is quite perplexing, given many seemed to hate the deal back when it was announced.
Adobe stock can’t seem to win either way. I think that’s just a testament to how unloved the software behemoth is right now, with a recession closing in and rates continuing to propel higher.
I think the overreaction in Adobe stock — both during the initial deal announcement and news of its potential blocking — was more of a fumble on Mr. Market’s part.
The company is firing on all cylinders on the innovation front, even though Adobe’s pursuit of Figma suggests it has to “buy growth.” Looking ahead, I’d look for Adobe to flex its AI muscles. The company is more than capable of leveraging AI to fend off AI rivals.
Is Adobe Stock a Buy, According to Analysts?
Turning to Wall Street, ADBE stock comes in as a Moderate Buy. Out of 22 analyst ratings, there are eight Buys and 14 Hold recommendations.
The average Adobe price target is $379.74, implying upside potential of 10.4%. Analyst price targets range from a low of $325.00 per share to a high of $440.00 per share.
Takeaway: Adobe Stock is the Epitome of Growth at a Reasonable Price
Generative AIs like OpenAI software ChatGPT, Dall-E, and Vall-E have been all the rage. Adobe is fully aware of the disruptive potential of AI, making it an intriguing “stealth” AI play in the software space.
At 32 times trailing earnings (21.8 times forward), Adobe stock hasn’t been this cheap in quite a while. The five-year historical average trailing price-to-earnings (P/E) multiple is around 50.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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