Adobe Stock Down: Time to Buy?

Adobe (NASDAQ: ADBE) has long been a tenacious software company. It was one of the first to move to a subscription model, a practice that nearly every software company has adopted. Now, the company is at the crossroads of another monumental change: generative artificial intelligence (AI).

The stock recently fell about 10% after Adobe released its latest financial results. So is Adobe losing the generative AI race? Or is something else going on?

Adobe’s Generative AI Model Gets a Lot of Attention

Adobe products are the industry standard in graphic design. Its design suite includes many programs tailored to specific applications and can be purchased for a monthly fee.

But with the rise of generative AI models offering free image generation, many investors fear Adobe could be in trouble. After all, it’s hard to compete with free solutions. But that’s a shortsighted approach. While some of these services may be free, they will eventually have to charge a fee. The power and data centers these services run on aren’t free, and while they may currently be able to survive on ad revenue on their website, that won’t always be the case.

When that happens, companies will likely continue to rely on Adobe’s image-generating AI model, Firefly. Management is bullish on its Firefly AI model and has begun integrating it into various programs. It has also seen massive adoption: 12 billion images have been generated using the model across its software suite.

Sure, Adobe is one of the leaders in the AI ​​gen image space, and not one that has been torn down. But why did the stock fall?

Adobe’s Q3 results were solid

For the third quarter of fiscal 2024 (ending August 30), Adobe reported revenue of $5.41 billion, up 11% year over year. That number exceeded management’s forecast range for the quarter of $5.33 billion to $5.38 billion, which is a great sign.

The story also applies to Adobe’s earnings per share (EPS), as the company reported earnings of $3.76 versus a range of $3.45 to $3.50. Typically, stocks don’t fall when the narrative around the company is on track and the company is reporting outperformance in terms of earnings over net income and net profit.

The problem investors found with Adobe’s results is that its forward guidance fell short of Wall Street’s expectations. Adobe had been forecasting $5.5 billion to $5.55 billion for Q4, while Wall Street was expecting about $5.61 billion. That would imply year-over-year growth of 8.9% to 9.9%, which could be a bit slow for some investors. However, Adobe’s management has a history of slightly underestimating growth, so it can beat its guidance every quarter. If management were to do that here, it could hit the range Wall Street wants.

So it looks like the sell-off was for a minor reason, but is this stock in a buy range?

Stocks are slightly cheaper than historical averages

For a mature company like Adobe, it makes sense to look at a valuation metric that includes earnings, such as the price-to-earnings (P/E) ratio or the forward P/E ratio.

ADBE P/E data by YCharts

While Adobe isn’t cheap by the broad sense of these valuation metrics, it is slightly below its historical averages on both measures. As a result, I think Adobe is a stock that investors can confidently buy here, as it has enough growth to continue to outperform S&P500 in a continuous manner.

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Keithen Drury has positions at Adobe. The Motley Fool has positions at and recommends Adobe. The Motley Fool has a disclosure policy.