Adobe Stock Plunges 6.4% YTD: Should You Buy the Dip?

Adobe ADBE shares have lost 6.4% in the year-to-date period, underperforming the Zacks Computer-Software industry's growth of 10%, the broader Zacks Computer & Technology sector's return of 22.4% and the S&P 500 index's rise of 18.2%. The drop comes amid broader market uncertainties.

ADBE has been suffering from a challenging macroeconomic environment, with high oil prices and elevated interest rates. Fears of a looming U.S. recession are certainly weighing on tech stocks, including ADBE. The ongoing Russia-Ukraine war also does not bode well for the company's business.

Nevertheless, its strong position in the digital content and marketing space on the back of its robust cloud-enabled products and growing generative AI capabilities has been boosting its business prospects. The solid momentum of the company's family of creative, generative AI models, Firefly, is a major positive.

However, Adobe faces stiff competition from the likes of Meta Platforms and Alphabet in the digital content space due to their growing generative AI efforts.

The challenges that Adobe is facing have put investors at a crossroads, raising the question: is it time to buy, hold or sell? To answer this, let us delve deeper into the fundamental aspects of the company.

Year-to-Date Price Performance

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Generative AI Strength: A Game Changer

Adobe's expanding Firefly-powered solutions portfolio has been a game changer in this booming AI era.

The company's introductions of Firefly Image 2 Model, Firefly Vector Model and Firefly Design Model are positives. It has bolstered the creative generative AI model family.

ADBE is gaining significant momentum among various enterprises on the back of Adobe Express for Enterprise, which is powered by Firefly Image Model 3.

The company also integrated Adobe Content Hub with Adobe Experience Manager Assets, which enables various brands to manage several creative assets seamlessly.

The launch of Generative Remove in Adobe Lightroom, which is a powerful Firefly-backed tool that helps remove unwanted objects from any photo in a single click in a non-destructive manner, is noteworthy.

Firefly has brought advancements in Acrobat, on the heels of which the company enjoys a dominant position in the Portable Document Format (PDF) market. Adobe is gaining solid momentum in this market on the back of its Acrobat AI Assistant.

It recently added features to Acrobat AI Assistant to allow customers to ask questions, get insights and create content from information across groups of PDFs and other document types, including Microsoft Word, Microsoft PowerPoint and text files. It also introduced enhanced meeting transcript capabilities in AI Assistant.

The company also offers Adobe Express Platform AI Assistant, which is capable of answering technical questions, automating tasks, simulating outcomes and generating audiences quickly.

The strong adoption of Firefly-powered tools has been aiding the performance of the Creative Cloud, Document Cloud and Experience Cloud segments of the company.

International Business Machines IBM is one of the notable customers leveraging Adobe Firefly. IBM was able to generate 200 campaign assets and more than 1,000 marketing variations in moments rather than months using Firefly models.

Adobe's other key customer wins include Samsung, Comcast, Mercedes-Benz, ULTA Beauty, Maruti Suzuki, ServiceNow, AECOM, AstraZeneca, Chevron, Wells Fargo, Novo Nordisk, Berkshire Hathaway, FedEx, Infosys, Rakuten, Volvo, Ralph Lauren and U.S. Department of the Treasury.

In second-quarter fiscal 2024, Creative Cloud generated $3.13 billion in revenues, up 10% year over year. Document Cloud's revenues were $782 million, up 19% from the prior-year quarter.

Meanwhile, Experience Cloud subscription revenues were $1.20 billion, rising 13% from the year-ago quarter.

Attractive Valuation

ADBE's attractive valuation should beckon investors seeking value. The stock is currently trading at a discount with a forward 12-month P/E multiple of 28.07X, lower than the sector's average of 31.61X. This reflects a good entry point for investors.

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Strong Projections Paint a Bright Picture

Adobe's long-term prospects are expected to benefit from its strength in Firefly.

For fiscal 2024, ADBE projects total revenues between $21.4 billion and $21.5 billion. It expects Digital Media revenues between $15.80 billion and $15.85 billion. The Digital Experience segment's revenues are anticipated between $5.325 billion and $5.375 billion.

The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $21.45 billion, indicating year-over-year growth of 10.5%.

Management expects non-GAAP earnings per share between $18.00 and $18.20. The consensus mark for fiscal 2024 earnings is pegged at $18.16 per share, suggesting year-over-year growth of 13%. The estimate has been revised upward by 0.1% in the past 60 days.

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Final Thoughts

Adobe's strong portfolio of generative AI-backed digital solutions, leading position in the PDF space, robust creative cloud products and solid customer momentum present an attractive investment opportunity for growth-seeking investors despite the macro challenges that it is facing currently.

The company's solid financial health, attractive valuation and upward estimate revisions bode well. We recommend investors buy the ADBE stock as it has upbeat growth prospects in this booming AI era.

Adobe currently carries a Zacks Rank #2 (Buy).

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