Prediction: This will be the next stock to follow Palantir’s path

Palantirhis (PLTR -1.99%) the stock has been rising like there’s no tomorrow for the past year and a half. Once famous primarily as a software provider focused on government customers, the data analytics and artificial intelligence (AI) specialist has made rapid forays into the commercial segment. Palantir’s cutting-edge software solutions help customers analyze vast amounts of data and gain actionable insights. The company’s artificial intelligence platform (AIP) based on large language models also helps attract new customers and upsell to existing customers.

Palantir shares are up about 110% in 2024 and remain a favorite on Wall Street. However, the stock trades at 33.6 times trailing 12-month sales, significantly higher than its three-year average price-to-sales (P/S) ratio of 20.7. This may be too much for many investors.

I believe that Adobe (ADBE -2.89%) has the potential to grow similar to Palantir and that it may prove attractive in the long term. Here’s why.

The decline in Adobe’s shares seems unwarranted

Adobe, best known for its Acrobat and Photoshop software, posted impressive results for its fiscal third quarter 2024 (ended Aug. 30), with revenue and earnings beating estimates. Despite that, the stock has fallen about 11% since the results came out on concern about weaker-than-expected fourth-quarter forecasts. Investors also seem concerned about monetizing its AI technologies, fearing the company could be left behind in the generative AI race.

However, this investor reaction seems unwarranted given that lower-than-expected revenue forecasts for the fourth quarter can be attributed mainly to the timing of the deal’s closing. Several deals that would have historically closed in the fourth quarter instead closed in the third quarter. Additionally, while Cyber ​​Monday sales are typically included in the fourth quarter, this time they will be included in the first quarter of fiscal year 2025.

Robust operational and financial performance

Adobe delivered an impressive financial performance in the third quarter. Revenue was $5.41 billion, up 11% year-over-year, and non-GAAP (adjusted) earnings per share were $4.65, up 14%. The company also reported remaining performance obligations of $18.14 billion at the end of the third quarter, implying strong prospects for future revenue growth.

Adobe has focused on integrating more AI capabilities into its cloud document products. These include AI Assistant to improve productivity and user experience with digital documents and generative AI-based text-to-image generation capabilities (powered by the Firefly model) in PDF documents. The company has also partnered with third-party ecosystems including ABC Google Chrome and of Microsoft Edge to offer its products as browser extensions. These initiatives have resulted in significant improvements in monthly active users, overall usage and free conversions for its cloud document products such as Adobe Reader and Acrobat.

Adobe has also integrated new generative AI features powered by Firefly into cloud offerings such as Photoshop, Illustrator, Lightroom and Premiere Pro, helping to increase customer retention and upgrade to higher value plans .

This implies that Adobe’s AI capabilities are helping to strengthen and drive growth in its core business.

New revenue streams

Adobe’s AI tools can also open up new revenue streams. The company’s AI-first content creation app, Adobe Express, helps individuals, students, teams, and businesses with fast-paced design tasks. Adobe Express saw a 96% quarter-over-quarter increase in monthly active mobile users and an 86% year-over-year increase in app creations in the third quarter. Strong demand, along with pricing on freemium tiers, can help generate significant long-term revenue.

Adobe uses generative credits to track computational usage of its generative AI tools powered by the Firefly model. The company seems to be considering limiting the use of generative credits in its apps. As demand for the company’s generative AI tools increases, customers may be charged for generative credits above the cap.

Adobe is also preparing to launch a text-to-video model powered by Firefly by the end of 2024. Leveraging the company’s image and video capabilities, Firefly video could pose a strong challenge to OpenAISora’s model. The company is considering launching premium AI subscription plans to give customers access to advanced text-to-video and picture-to-video capabilities in its core creative products.

The rating is reasonable

While it may take some time for Adobe to monetize its AI tools, the company seems to be moving in the right direction. In addition, the company has strong fundamentals.

Despite this, Adobe trades at 11.2 times trailing 12-month sales, less than its historical five-year average P/S ratio of 13.3. That 12-month figure is about a third of Palantir’s P/S ratio.

Given Adobe’s robust business model, several AI-powered tailwinds, and a reasonable valuation, the company could see healthy growth in the coming months.