This artificial intelligence (AI) stock has fallen 15% in the past month. Here’s why I’m not selling.

Artificial intelligence (AI) stocks come in all shapes and sizes. Some are companies built from the ground up to use AI, while others have adopted it simply to adapt to the current environment. Adobe (ADBE -0.43%) is one of those companies that has integrated AI into its line of graphic design tools, but the stock hasn’t reacted positively.

Shares have fallen 15% since the release of the last earnings report. However, I don’t think there is any reason to sell the stock here and this could be an opportunity to buy more.

Adobe has integrated generative AI into its suite of products

Adobe’s graphic design suite is the default product for those working in a field that requires digital media creation. This field could be disrupted by generative AI technology, as many of the top models have imaging capabilities. However, Adobe has gone ahead of this and developed its own generative AI model, Firefly.

Firefly is incredibly useful. It allows its users to modify image and vector files with text input. They are also working on a version that can be used for video, which is a capability that few generative AI models currently have. The usage of Firefly has been incredible, with management stating that Firefly has created over 12 billion images.

Adobe is a shining example of a company that moved quickly to implement generative AI before it was disrupted. By getting these tools into the hands of its users before other options became available, Adobe drastically reduced the risk of being replaced by another product.

This is essential because Adobe is the established player in this industry and needs to maintain its market dominance to maintain its premium price.

Adobe stock looks like a buy after the recent slump

Adobe has long been the industry standard for what software companies want to be as they mature. It regularly posts gross profit margins of nearly 90% and net income margins of 30%.

Although it is not growing as fast as before, it is consistently delivering double-digit revenue growth year over year.

ADBE operating income data (quarterly annual growth) by YCharts

It generates a lot of free cash flow, which management uses to buy back stock. Over the past three years, Adobe has reduced its shares outstanding by about 7%. While that’s not a massive discount, it’s hard to make such a big drop in share count when the stock trades for a premium valuation.

ADBE Data ON Report by YCharts

Adobe stock isn’t cheap at 43 times trailing earnings and 28 times forward earnings. Adobe has been performing at a high level for a long time, so it earns a premium rating. However, 28x forward earnings is not that expensive compared to its consistent growth rate and execution history, especially compared to other stocks.

However, it traded at a much higher price just last month based on Wall Street’s reaction to its earnings report. So what was so bad about the report?

It all had to do with its Q4 revenue guidance, which management estimated would be between $5.5 billion and $5.55 billion. However, Wall Street was expecting $5.61 billion, so the stock sank. This reaction is not fair to Adobe, as it met all of management’s projections.

Using the guidance for the full-year revenue range management gave in Q2 ($21.45 billion for fiscal 2024) and comparing it to the revenue generated in the first three quarters plus its guidance for Q4 comes out to exactly the same number. This is a case where Wall Street wants Adobe to deliver higher growth, but management disagrees with that assessment.

This is a ridiculous reason to sell a stock because investors knew what they were getting before these results were available. As a result, I don’t think it’s time to sell Adobe, and it may be time to take advantage of a historically attractive stock price. Adobe is still a top player in its space, even with generative AI plaguing it, and I’m excited to see what other tools it brings to market.