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Adobe Systems
ADBE-Q
BUY
Jun 06, 2023
Stock price when the opinion was issued
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She got sick of holding this, because they have trouble with Photoshop--now people can use the tools found in PS elsewhere. She sold before the quarter. Also with Meta, clients can create their own ads using Meta's tools. Adobe hasn't moved fast enough to develop such tools.
He bought more. They beat top and bottom lines, and raised guidance. He's a value investor. Sure, the share price has been terrible, but their earnings estimates are starting to rise and they're buying back share to reduce the share count 5% in the past year. They are meeting the competitive threat through their beats and guidance. They outperform consistently. Eventually, the share price will rise.
Still stands out, but the fear is that it won't in the world of AI. And that's why it looks particularly interesting. Good earnings, upped guidance, yet stock fell. Valuation has collapsed to 17x PE. Still likely to grow double-digit EPS this year, and consensus is still 14-15% EPS growth over the next 3 years.
There is more competition, but it's spending 18% of sales on R&D, so something compelling will turn up. No dividend.
Not as though they make buggy whips. Lots of different products in everyday activities, such as the PDF option if ChatGPT fails to work. This presence is likely to continue.
If you own it and it's been painful, you could try the 1x2 call spread discussed earlier in today's show. Or you could look to generate some call premiums by selling some upside calls. On a stock that's been beaten up like this, the option prices are typically high. So if you want to start extracting some premium from that, there's definitely an opportunity to do that.
Value's deteriorated because of low-cost competition. Product prices are too high. Many investors don't think it can monetize on its AI capabilities. Getting into cloud, but can't compete with MSFT, AMZN or GOOG. Figma (a takeover target it failed to acquire, but which had a wildly successful IPO yesterday) can do exactly the same thing at a fraction of the cost. Don't catch a falling knife.
Since Nvidia went ballistic on May 25, through June 2 Apple shares have climbed 5%, Microsoft 6% and Adobe nearly 17%. (NVDA itself soared 30% and counting.) Adobe already positioned itself as an AI stock in Generative AI back in March when it announced Generative AI functionality with Firefly that will make it easier and faster for Adobe users to use the company’s publishing tools, such as swapping background images and marketing text. Before that in 2022, the company announced new AI and machine learning features in its marketing and analytics software package, Experience Cloud. The market is banking on the new AI features to generate more revenues from Adobe’s subscribers. Read Top 3 AI Stocks for our full analysis.