adobe (NASDAQ:ADBE) may need to move creatively in the AI age. Stocks have taken a beating over the past year, now around 50% below their all-time high. With the recent buzz surrounding OpenAI’s Dall-E 2 (an “AI system that can create realistic images and art”), questions linger as to what the future holds for the creative software giants. Indeed, the rise of creative AI raises some fascinating questions.
For now, Adobe stock is feeling the full force of the headwinds. In this article, we’ll take a look at the medium- and long-term factors Adobe stock investors need to watch.
To be sure, Adobe has enjoyed a wide moat around its suite of creative and productivity tools. Photoshop, Illustrator, and Acrobat are household names. With Figma thrown into the mix, Adobe still seems to be going strong in a market that could prove difficult for rivals to challenge.
News of Adobe’s acquisition of Figma raised some interesting questions about whether Adobe’s moat is wide enough to hold its own against smaller emerging competitors in the creative software space. The $20 billion price tag was pretty jarring.
The Figma deal appears to resemble some of the social media deals made by Meta Platforms (NASDAQ: GOAL) to defend their territory against newcomers. However, given the damage to Adobe’s stock price over the past year, I don’t think antitrust regulators are as tough as they would have been if the stock had been at a new all-time high. In that way, the vicious slide in Adobe stock may have a silver lining.
Adobe will have to play some defense
The company has expanded beyond creative software and has looked to marketing (Adobe Experience Cloud) as a source of growth. Even as Adobe looks for new growth arenas, it needs to play defense when it comes to creative software. Ultimately, its creative suite is the company’s bread and butter, and Adobe will not only have to keep an eye on emerging innovators like Canva (the Canva acquisition looks dubious after a deal with Figma, as it would attract even more attention from regulators); it is the rise of creative AI.
For now, I’m staying neutral on Adobe’s stock. I think it’s modestly valued at 34.1 times final earnings. The current multiple is still well below the software industry average of around 47 times. In addition, shares of the mature tech firm still trade at a significantly higher premium than most big tech/FAANG stocks.
In fact, the ~$160 billion firm is quite similar to FAANG, given its impressive growth, sizable moat, and impressive network. With that, I don’t think a price-to-earnings (P/E) multiple in the 1920s is all that unreasonable, especially given the magnitude of the recent “reset” of Adobe’s stock valuation.
So there could be further downside if the Fed stays hawkish. Also, as creative AI seeks to change the world of digital design, questions linger about how Adobe will keep its moat wide.
It’s time for Adobe to get creative
Adobe may have faced challenges from smaller, more innovative companies like Figma and Canva. That being said, I think it’s a bad idea to dismiss Adobe’s innovative and creative capabilities. The company is not going to sit by and look to acquire rivals as they appear on the radar. Doing so would likely put the company in the bad books with regulators.
For now, I don’t see the acquisition of Figma as the start of a trend of only acquiring rivals. However, I believe that Adobe will need to embrace AI to avoid potential disruption, as AI-powered creativity platforms like DALL-E bring a new breath of innovation to the field of creative software.
Adobe has its own artificial intelligence tools. Whether we’re talking about Adobe Sensei or the recently released enhanced speech tool, the company knows the wave of disruption that AI could bring to the creative space.
Overall, I think Adobe has done a great job of staying ahead of the recent innovations. In addition, I would look to see Adobe continue to acquire small companies to help boost its AI capabilities.
Are ADBE shares a buy, according to analysts?
Returning to Wall Street, ADBE shares appear as a Moderate Buy. Of the 23 analyst ratings, there are nine buy recommendations and 14 hold recommendations. Adobe’s median price target is $385.51, implying 12.95% upside potential. Analyst price targets range from a low of $325.00 per share to a high of $475.00 per share.
Food to go
Even with creative AI taking center stage, I think Adobe will still be relevant for many years and decades to come. It will be interesting to see how the company stacks up against other creative AIs as they come along.
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