Adobe Inc. (ADBE, Financial) is slated to report earnings on Sept. 14. With a hot run-up into the quarterly reveal, the stakes seem high, perhaps too high for the liking of disciplined value investors. Indeed, the technical picture looks quite sound for the creative software company behind Photoshop, even after the stock market rode a rough patch last week.
Though the stock's resilience has been remarkable, I am not a fan of the swelling price of admission. Since its May 2023 lows, the stock has soared more than 67%. That is quite an explosive return in just a few months. Arguably, the relief surge was warranted, given how battered Adobe's stock was through most of 2022.
Caution ahead of quarterly report
In any case, I would want to avoid chasing the momentum going into Adobe's coming quarterly numbers. Though I am enticed by the type of generative artificial intelligence tools and technologies (think Adobe's generative AI image creator Firefly), it could take a while before such technologies are able to work their way into the numbers. Not to mention that Adobe Firefly remains in the beta stage.
One major analyst is upbeat
So what should investors expect from Adobe as it pulls the curtain on its third-quarter results on Thursday?
Just last week, Mizuho analyst Gregg Moskowitz hiked his rating on shares of Adobe to buy from hold, also hiking the price target by more than $100 to $630 per share, up from the initial $520. Given the timing of the big upgrade, Moskowitz seems upbeat about the company going into its third-quarter numbers. In fact, he thinks Adobe's digital media segment could see its annual recurring revenues improve in the third and fourth quarters.
In addition, he views Adobe's generative AI product as a "significant" growth driver. Indeed, Firefly may be able to help lift the company quicker than expected. And as the company rolls out generative AI capabilities across Photoshop and other offerings within the creative cloud, the company may be able to add to its impressive gains on the year.
Adobe Firefly is the real deal
I have had the opportunity to try Adobe Firefly as well as other AI-driven image generators, including OpenAI's Dall-E. Compared to Dall-E, Firefly's quite a bit quicker, with sharper images. That said, Dall-E has its own strengths over Firefly.
In my personal round of testing, I found Dall-E was better at knowing what I wanted based on my prompt. Of course, your mileage will vary based on what you enter in the textbox. Regardless, I am thoroughly impressed with Firefly, and I think it is impressive the platform only stands to get better from here as it moves out of the beta stage.
Competition in the AI image generation space
As impressive as Adobe's AI talents are, there are noteworthy competitors. And it is not just OpenAI's Dall-E that could give its generative AI products a good run for their money. At this juncture, I believe AI image generation is likely still in its infancy, making it very tough to tell which companies or products will come out on top in five, 10 or even 20 years from now.
Given Adobe's domination in the creative software space and its many AI talents, I certainly would not bet against the company. Further, let's not forget that it has plenty of financial firepower to acquire a potential competitor.
Adobe's potential for acquisition
The company's $20 billion pursuit of web-based design application Figma was met with some antitrust resistance, and for good reason. Regulators simply do not want behemoth-sized tech companies to simply acquire the competition. In the realm of creative software, there is no shortage of competitors, especially as generative AI takes center stage.
For now, I share Mizuho's optimism that Adobe can continue to innovate on the front of AI. Although I am not sure Firefly can help the company soar past earnings, given how overheated the stock is after its incredible year-to-date run, I would certainly be very interested in picking up the stock if it were to dip post-earnings.
What about valuation?
At the time of writing, shares of Adobe trade at a lofty 53.47 trailing price-earnings ratio or 31.65 times forward earnings. Indeed, the price of admission has gone way up in recent months, thanks in large part to the hope that generative AI products can bolster growth. I share some of the AI enthusiasm. However, I would be more inclined to wait things out. The stock looks overbought and in need of a near-term pullback.
More or less, I view Adobe as fairly valued, even given the potential of its Firefly AI.
The bottom line
Adobe may be an underrated AI stock that is more than capable of making a run for new highs. "Mad Money" host Jim Cramer thinks Adobe is one of the top software plays in the AI space today. Until Adobe clocks in a blowout quarter, though, I remain on the sidelines, hopeful the stock can retreat so I can be a buyer of the dip.
