3 Reasons Adobe Stock Could Continue to Fall and 2 Reasons It’s Still Worth Buying Now

Stock prices of Adobe (ADBE -2.86%) sold off after the company reported its fiscal third-quarter 2024 results on Sept. 12 and management offered weak guidance for the rest of the year. The stock has now traded up more than 10% year-to-date, compared with a gain of more than 14% in the tech sector and a 17.8% gain for Nasdaq Composite.

Still, despite some notable challenges that could weigh on the stock’s near-term growth, Adobe is worth buying now. Here are three reasons why.

Image source: Getty Images.

1. Overall results are likely to remain weak in Q4 and for the fiscal year

Based on updated fourth-quarter fiscal guidance, Adobe management expects the company to post $21.43 billion in revenue and $18.27 in non-GAAP (generally accepted accounting principles) earnings per share (EPS) for the fiscal year 2024.

If it hits that goal, its revenue would be just 10.4% higher than fiscal 2023, marking another year of slowing growth. Based on its non-GAAP revenue guidance for fiscal 2024, Adobe would have a price-to-earnings ratio of 29.4, which isn’t bad for an industry-leading growth company. But it’s worth noting that Adobe’s GAAP earnings tend to be about 30% to 40% lower than its non-GAAP earnings.

In fiscal 2023, Adobe earned $11.82 in GAAP diluted EPS, but $16.07 in non-GAAP diluted EPS. Stock-based and deferred compensation accounted for $3.78 per share — the vast majority of the adjustment. Like other technology companies, Adobe has a sizeable stock compensation program to attract top talent and compensate them with equity in the company. It has increased the pace of its stock buybacks to help offset the dilution caused by stock-based compensation, but it’s still an expense worth watching because it has a strong impact on Adobe’s earnings.

In conclusion, Adobe’s sales and earnings growth over the past two years has been unimpressive, especially compared to other artificial intelligence (AI) tech companies.

2. Adobe’s competition is growing

For years, Adobe has reaped the benefits of owning a suite of industry-standard software programs such as Photoshop, Illustrator, Acrobat, and InDesign. As well as being proficient in Microsoft Excel or PowerPoint look good on a business professional’s CV, knowledge of Adobe products can be a basic requirement for many jobs in the creative sector. There are a lot of advantages to being the default product in a category. However, these advantages can sometimes cause companies to become complacent, less innovative or operationally inefficient. Before 2023, Adobe relied heavily on its consolidated position rather than ensuring it still had the best deals. This advantage is no longer good enough.

Competition has increased a lot, especially in recent years. The biggest threat to Adobe is probably Canva, which is a much cheaper but effective solution. Canva Pro costs just $15 per month per person — a quarter of the price of Adobe’s creative cloud. Canva has tools for document presentations, social media, video, websites, and more. It also has generative AI tools that compete directly with Adobe solutions.

The software in Canva’s product suite is still a step below Adobe’s. But if it innovates faster than Adobe, the price difference could make it a compelling alternative, giving it a greater opportunity to eat into Adobe’s market share.

3. Adobe’s business model is under fire

Another threat to Adobe is its business model. Adobe launched Creative Cloud in 2012 and began offering its suite of applications through subscriptions. This was probably the biggest decision in the company’s history. The software-as-a-service business model creates predictable recurring revenue and can open the door to steady growth. However, if improvements to Adobe’s products eventually allow one user to do the work that used to take two or three users, then the subscription price would have to go up a lot to make up for the declining number of users.

This type of threat is something that all enterprise software companies need to be concerned about, not just Adobe. While it’s still far too early to see signs of this happening, it’s still something worth keeping an eye on.

Adobe still deserves a closer look for 2 reasons

Despite its slow growth, expensive valuation, competition, and the uncertain future of Adobe’s business model, I still think the stock is a great buy right now. Here are two reasons why:

1. Adobe is well positioned to revolutionize marketing and save its customers a lot of money and time in developing advertising campaigns. And if it does that, it could open the door to a whole different level of product offerings. I could see Adobe developing a high-octane AI-powered enterprise solution that costs thousands of dollars per year per user rather than hundreds of dollars, but adds so much value that it’s worth the price.
2. Adobe stock looks expensive based on its current growth trajectory. However, it is still early in its AI development process and needs time to develop its offerings and monetize its new tools. Meanwhile, Adobe is well positioned to thrive on the need for more content in all forms of digital media.

The stock’s balance of risk and potential reward should be very attractive to investors who believe in Adobe’s ability to innovate and monetize AI. However, it could take years for the company to complete this leap. And for investors who don’t think Adobe can kick its business into a new gear, I’d say they’d be better off flipping the stock at this point.