This artificial intelligence (AI) growth stock looks like an incredible bargain after selling off 12% after earnings

Expectations for many artificial intelligence (AI) actions are extremely high. If an earnings ratio is not absolutely perfect, perhaps even better than perfect, investors could sell the stock, driving the stock price down.

I’ve seen this happen with Nvidia a few weeks ago. Despite the strong earnings results, management’s positive outlook for the next quarter fell short of Wall Street’s most optimistic expectations. Management even gave assurances on some of the biggest question marks surrounding its business heading into earnings, such as the launch of the Blackwell chip. However, the stock price fell significantly after Nvidia’s quarterly update. Investors who bought the dip saw the stock bounce back.

Now, another AI stock presents an incredible opportunity to buy shares following the subsequent earnings selloff. Despite strong results in the third quarter, Adobe (ADBE -1.34%) has seen its share price fall about 12% since its most recent report. Here’s why investors should consider buying or adding to a position in the company.

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Wall Street’s hyper-focus on a single number

Adobe’s recent stock performance has been closely tied to a single metric in its quarterly reports. Each quarter, management shares net subscription revenue for its digital media products — Adobe Creative Suite and Document Cloud. It reports the number as annual recurring revenue, or ARR.

When Adobe reported disappointing ARR growth in the first quarter, the stock fell. But second-quarter results appeared to ease most analysts’ concerns, as they easily beat expectations and provided strong guidance for the third quarter. Adobe’s third-quarter ARR exceeded this strong guidance, coming in at $504 million.

The problem stems from its fourth-quarter guidance. Analysts were expecting a guidance of around 565 million dollars. So Adobe’s expectation of “only” $550 million in net new ARR was a big disappointment.

Importantly, that $15 million could easily have made it into the next quarter’s report. Speaking of strong third-quarter performance and weak guidance, Digital Media President David Wadhwani told analysts that it closed some deals in the third quarter that it has historically closed in the fourth quarter.

In other words, it brought some results. Given that Adobe beat its third-quarter ARR guidance by $44 million, investors shouldn’t be as concerned about its fourth-quarter guidance. This looks like a case of myopia on Wall Street.

Artificial intelligence brings great results

Many investors see the proliferation of generative AI as a major threat to Adobe’s Creative Suite and overall user growth. With competitors developing exciting new AI tools that can create photos or videos and easily edit them with natural language instructions, some say Adobe’s tools will become useless.

Adobe shows that the opposite is true. Generative AI is bringing more people and businesses to its suite of creative software. Adobe developed its own AI model, called Firefly, and integrated it into Creative Cloud. Firefly offers new features such as Generative Fill in Photoshop, Generative Removal in Lightroom, and Text-to-Template in Express. He is working on Generative Extend for Premier Pro, which would add frames to videos using Firefly.

The AI ​​features in Express, which Adobe offers for free, drive new signups. And Adobe is successfully converting those signups into paying customers. CFO Dan Durn said new subscriptions are the biggest contributor to his revenue growth.

That said, the ability to upsell subscribers to new products and greater access to AI features has also helped. However, Adobe still has a long way to go by building new AI capabilities into its software suites and asking users to pay more to use them. It has already expanded its document suite by integrating an AI assistant into Acrobat that can summarize documents, combine information from multiple documents, and generate and format content for presentations, emails or other forms of communication.

Despite heavy investments in AI, management has maintained a high operating margin. Last quarter’s non-GAAP (generally accepted accounting principles) margin of 46.5% was up slightly from last year’s 46.3% margin. In other words, management does not sacrifice profitability for the sake of avoiding AI-based competitors.

After the recent selloff, the stock is trading at about 28 times forward earnings estimates. Although this is a slight premium over the general S&P 500 index, is a price worth paying for a company that is an established leader in its industry. Despite the new competition, Adobe is showing that it is more than capable of keeping smaller players at bay while maintaining strong growth and profitability.