AI Is Driving Innovation and Growth at Adobe

Today’s buzzwords are “Generative AI.”

While there are plenty of stocks that claim to leverage the technology, few actually do.

You may not realize Adobe Systems (ADBE) is a big player in this space.

However, financial pros certainly know about the company, as they search out the ADBE ticker at a rate 50% higher than the next design and development stock, according to our TrackStar data.

A company once only known for PDF files has transformed itself into a digital art and design powerhouse, whether it’s digital signatures or graphic design.

Unlike many of its AI peers, like Microsoft, shares of Adobe are off their all-time highs by almost 40%. Combined with the recent 25% rally, it’s probably why financial pros are taking a hard look.

Adobe’s Business

If you’ve ever opened a PDF file, edited a photo, or watched an online video, chances are you’ve used an Adobe product. 

Adobe is a global leader in digital media and digital marketing software with a mission to change the world through digital experiences. The company serves customers worldwide in many industries, such as education, entertainment, government, healthcare, and retail. 

Source: Adobe Q1 2023 Earnings Report

Like many software companies, Adobe pivoted from software to subscription sales using its cloud-based software products and services, such as Adobe Creative Cloud, Adobe Document Cloud, and Adobe Experience Cloud.

Source: Adobe Website

Adobe isn’t just a pioneer in digital media and marketing but also in artificial intelligence (AI). 

AI enhances its products and services, making them more powerful, intelligent, and personalized. For example, Adobe’s AI platform, Adobe Sensei, powers features such as content-aware fill, face-aware liquify, auto-tagging, and smart cropping. Adobe Sensei also enables customers to create and deliver engaging and relevant digital experiences across different channels and devices.

Financials

Source: Stock Analysis

For a company with an almost $200 billion market cap, Adobe has done a fantastic job growing sales while holding margins steady.

With a ridiculous free-cash-flow margin of ~40%, management has reduced share count by 5% since 2019, which used up a good chunk of the free-cash-flow, while it also paid down some of its long-term debt.

The company now holds $1.5 billion more in cash than its $4.1 billion in debt.

Valuation

Source: Seeking Alpha

Adobe isn’t cheap by pretty much any standard. But then again, none of its peers are.

All of them trade at P/E ratios above 40x, while Unity Software (U) isn’t profitable, nor does it generate positive cash flow.

The one metric where Adobe isn’t half bad is price-to-cash flow at 25.6x, though it’s still expensive relative to most technology stocks.

Growth

Source: Seeking Alpha

Adobe shines when it comes to consistent growth, whether its revenues or earnings.

Many of its peers exhibit higher growth rates, but that’s largely due to their smaller size.

Notably, Adobe doesn’t expect its EBITDA, a decent proxy for cash, to grow much next year.

Profitability

Source: Seeking Alpha

When it comes to margins, Adobe isn’t just the top of the pack; it’s consistent.

Importantly, its net income margin of 26.3% is the highest of the group, while the free-cash-flow margin is only edged out by Autodesk (ADSK).

Our Opinion 9/10

You might be wondering why we’d give such an expensive stock a 9/10.

Looking back at its history Adobe now trades at or below its price-to-earnings and price-to-cash flow averages going back almost a decade.

While it could face a large correction, we see the upside potential with AI as too lucrative to ignore.

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