Adobe Systems (ADBE)

About $120 higher to analysts' target from where it's trading today. So you'd think it was a buy. But it's a software stock, and there's a lot of talk about how AI might cannibalize software companies. 

He trades it by selling short-dated puts and calls. Volatility in marketplace is keeping volatility on ADBE options relatively high.

They made their last quarter, but that was mainly due to them raising their prices. He'd rather see organic growth or new deals like Workday is.

Earnings are tonight, so who knows what will happen? The narrative is very negative. But it continues to add ~10k subscribers a day to its Photoshop suite. Continues to deliver good, solid topline growth. Trading at half the valuation of 12 months ago, very attractive risk/reward.

Margin of safety is very high with a long-term view. It's investing heavily in its own AI suite of products. Not only Photoshop, but also document cloud business and CRM software.

They report Thursday. Has fallen dramatically out of favour, similar to Salesforce which reported a big earnings surprise, but disappointing guidance. The street feels that software as a service is vulnerable to AI. Adobe has the best product, though. Is it enough to lift the stock?

Valuation fairly attractive, low relative to other mega-cap tech names. Chart doesn't speak to a positive buy, lower lows and lower highs. Price is below a falling 200-day MA. Investment community has shown disdain for every announcement on AI.

Honestly, nobody knows how this will play out. But for companies like Adobe, the presence of AI has not hurt their recent quarters.

Capital allocation framework and organic growth prospects of AVGO are better than ADBE. 

AVGO is in his dividend growers mandate, with very compelling organic growth. Over coming 3 years, earnings expected to grow 20% and the dividend along with them. Software companies are spending all the $$ in the AI race. Who's getting it? The hardware makers, so chip makers are well positioned. Continues to buy.

AI has penetrated what Adobe does and has reduced the spend on Adobe products. It's difficult for them. She eventually sold it.

The chart looks terrible. Consumers want the cheapest software, even the apps on smartphones, and this hurts Adobe.

He sold it two years ago, because the valuation was expensive and had questions about their AI transition. Also, them not buying Figma was another factor. He still wouldn't buy it. Software companies are being challenged by AI.

He will reserve final judgement until the next earnings report in September. If they show weak results, or good results but the street doesn't care again, then he will sell. But he doubts that. Everyday, we use PDF files. There's competition, but Adobe is doing a good job.

Views it the same way as Intel. He feels the investor's pain, but finally got out of the way. Slow on execution with AI, and hopes this will change. Firefly had pretty good fanfare and brought many software components together. Doesn't think AI will eat their lunch because AI is more about single solutions than multiple solutions. Lots of brand loyalty. 

Will still be around in 3 years, but 10 years could be a different story.

It has surprised earnings for many, many quarters in a row, and have been buying back shares. It isn't news that AI is troubling this stock, but so far it hasn't shown up in the results. The AI impact is overly priced in, seen whenever they report each quarter some outperformance. That said, he's giving this one more earnings season.

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.

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.