Stocks to buy

Adobe (NASDAQ:ADBE) stock is in for more than just a banner year.

Reporters and analysts like to say that Artificial Intelligence will replace us all. No company shows that’s a lie like Adobe. Adobe has been helping non-artists turn out stuff that looks artistic since the 1970s. During the last decade it brought its tools to the cloud.

But when the tech wreck came in 2022, beached Adobe, shares fell from nearly $660 to $275. The highlight was a September plunge of over $100/share when it bought Figma, a collaborative design platform that might have become competition, for $20 billion.

Since then, there has been a slow recovery, to $373 on April 13. First quarter earnings of $1.25 billion, $2.71 per share, on revenue of $4.37 billion beat estimates. So did continuing share buybacks of 5 million shares, over 1% of the float.

But what comes next?

The AI Revolution

ADBE stock will benefit from the company being at the heart of the generative AI revolution.

We think of this in terms of words, but images are a huge part of it. Adobe is adding the feature, based on a system called Sensei AI it has been working on for a decade. 

Adobe Firefly competes with tools like Open AI’s DALL-E and Leap Motion’s MidJourney. But it’s built entirely with licensed and out-of-copyright content, which will help in corporate markets.

Adobe is also avoiding (so far) the mass layoffs that hit Cloud Czars Meta Platforms (NASDAQ:META), Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) and Amazon.Com (NASDAQ:AMZN). It did cut 100 sales positions late last year, but it didn’t hire aggressively during the COVID pandemic, increasing headcount by just 12.5% last year. 

Chief Strategy Officer Scott Belsky says Firefly can “turn a creative into a creative director,” using prompts to create art instead of picking up a pen.

Adobe paid a high price for Figma because it lets creatives collaborate without losing image quality. In this way everything is an evolution, rather than a revolution, solving problems and taking out bottlenecks rather than replacing anyone.

The Microsoft Model

Bringing out people like Belsky and CFO Daniel Durn to be the public face of the company is also important to demonstrate the executive bench behind CEO Shantanu Narayen, who is now 59.

With the PC revolution nearly 50 years old, the transition to a third generation of leadership is important for investor confidence.

This is a model also embraced by Microsoft (NASDAQ:MSFT). Adobe Creative Cloud has ridden on the Azure cloud for a decade. If any company could buy the $172 billion market cap Adobe, it would be the $2.12 billion market cap Microsoft. That kind of deal would make sense since

ADBE stock is still down 28% over the last two years while Microsoft, propelled by OpenAI, is now up 12% over that period. That backstop may be why institutions like Greypoint are increasing their positions in Adobe, and why the stock is now doing well even on down days.

The Bottom Line

Adobe is a well-run company, well positioned for the AI revolution.

But it’s not a cheap stock. You’re paying 37 times earnings and nearly 10 times sales to get into it. That’s expensive for a company that grew revenue just 9%, year over year, in the last quarter. It’s also expensive when you can still buy a long bond paying 5%, an implied price to earnings ratio of 20.

It’s not too expensive. However, if you look at AI as a set of productivity tools, it will take years to adopt. Seen that way, AI should be built on existing software rather than replace it. That’s Adobe’s approach. It’s a conservative play in the AI hype fest.

On the date of publication, Dana Blankenhorn held long positions in MSFT, GOOGL and AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. His 10th novel is The Time Tunnel, now available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.

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