This downtrodden tech stock is a springboard for decades of AI-fueled growth

On September 13, Adobe (ADBE -2.86%) Shares fell 8.5% in response to fiscal 2024 third-quarter results and weak guidance.

Here’s why Adobe is a top growth stock to buy now and what to look for from the enterprise software company.

Image source: Getty Images.

Unimpressive growth

Adobe reported record revenue in the third quarter, but only estimated $5.5 billion to $5.55 billion in fiscal fourth quarter 2024 and non-GAAP (adjusted) earnings per share (EPS) of 4.63 to to $4.68. In its June report, Adobe indicated annual revenue of $21.4 billion to $21.5 billion and non-GAAP EPS of $18 to $18.20. Through the end of the third quarter, Adobe generated $15.9 billion in revenue and $13.61 in non-GAAP EPS.

Taking into account updated Q4 guidance, the midpoint of Adobe’s full-year projections is for $21.43 billion in revenue and $18.27 billion in non-GAAP EPS — which is in line or even slightly better than his previous predictions. Investors might have expected accelerated growth from Adobe, given that the stock rose nearly 28% between June 13 and September 12 — which was the period before its second-quarter print and its recent report.

Expectations aside, the bigger issue is that Adobe’s growth is slowing. The company is on track for its second straight year of revenue growth of about 10% year-over-year.

Data source: Adobe.

Although Adobe is growing revenue faster than revenue, the pace of top- and bottom-line growth simply isn’t good enough to justify Adobe’s premium valuation. But there’s reason to believe that growth rate could pick up and make Adobe look like a better value.

Adobe’s AI opportunity

Adobe pioneered the software-as-a-service business model, launching its bundled offering called Creative Cloud in 2012. The strategy catapulted Adobe to the software giant it is today. Although Adobe has released new products and improved existing tools, it has largely been at ease for several years thanks to its wide moat and entrenched position.

Artificial intelligence (AI) has opened the door to the most significant product updates since the company launched Creative Cloud. Adobe has integrated AI functionality into its flagship products, offers subscription add-ons for AI assistants, and launched completely new products such as Adobe Firefly — a generative AI tool for images, vectors, design and video.

Adobe deserves credit for rapid innovation. But those improvements have come at a cost, as Adobe’s operating expenses have outpaced its revenue growth over the past three years. Short-term focused investors can look at Adobe’s cost profile, weak growth and valuation and choose to short the stock. However, patient investors could benefit from thinking about what will generate long-term returns for the company.

In essence, Adobe wins when its customers produce work of greater quality and quantity. If AI can help creative teams complete complex tasks and handle basic tasks faster, then it stands to reason that Adobe could justify the price hikes. In other words, Adobe needs to provide value to its customers, especially given that alternative solutions are often cheaper than Adobe’s offering.

Creative Cloud costs $59.99 per month for individual users. Adobe strongly steers buyers toward the bundled option with relatively high prices for individual apps, such as $22.99 each for Photoshop, Premier Pro, Illustrator, After Effects, InDesign, and others. Adobe has developed new tools to strengthen the Creative Cloud package and help justify the price increases.

For example, AI Assistant for Acrobat costs $4.99 per month and uses AI to answer questions and provide summaries. This can be an invaluable tool when tasked with a long and complex document.

Adobe Express costs $9.99 per month and is built for mobile, allowing users to create flyers, resumes, TikToks, and Instagram Reels.

By developing new tools that enhance its core offering, Adobe can increase its recurring revenue and reduce its reliance on legacy applications.

Be patient with Adobe

Instead of focusing on Adobe’s short-term results, investors should turn their attention to Adobe’s innovation and AI monetization.

Adobe is making improvements to help marketing and creative teams save time and improve the quality of their work. The benefits of this approach may not be seen in short-term results. However, in the long run, this is exactly the type of strategy that can unlock sustainable growth and position Adobe to face its competition.

Add it all up, and investors get a great opportunity to buy Adobe while it’s still in the early stages of its AI-driven evolution.