ADBE Stock: Can Adobe Become a Leader in AI Image Generation?

The Adobe share price is down 4.48% since the start of 2024, but investors could be overlooking the company’s role in the AI theme. If Adobe can continue to offer value for money through its AI offerings, then ADBE stock could rise from its current level.

Adobe [ADBE] is a design software provider based in San Jose, California. The company reports its Q3 results on September 12.

This stock spotlight will look at how demand for Adobe’s Acrobat AI Assistant and Firefly ishelping to drive revenue growth. It will also consider the company’s position in the artificial intelligence (AI) image generation market, and unpack why it will need to continue to fine-tune its AI offerings in order to fend off competition.

Adobe Sees Acrobat AI Assistant Boosting Workplace Productivity

As more companies turn to AI for productivity and efficiency gains, Adobe has found that companies which might have initially been hesitant to invest in AI tools quickly come to appreciate the benefits.

A recent survey of more than 1,000 American workers found that 25% of workers share concerns about the impact of AI on their industry. However, four in five agreed that they would be willing to “embrace AI technology if it could save them 10 or more hours per week.”

The survey data also found that there were significant cost benefits. For example, employers in the advertising and marketing industry could save $1,341.47 per week if their companies use Adobe Acrobat AI Assistant.

“This not only shows the transformative power of AI in document handling but also highlights the immense value that AI Assistant can bring in amplifying workplace productivity,” the report stated.

Adobe’s AI segment will be in focus when the company reports its Q3 earnings on September 12.

ADBE Stock Soars from 52-Week Low

ADBE stock is down 4.48% since the start of 2024 through September 9, but the most recent close of $569.88 represents a 31.32% gain on the 52-week low of $433.97, set on May 31.

The Adobe share price is up 1.7% in the past year.

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Adobe and Autodesk Both Saw Higher Demand for AI-Infused Products in Q2

The Adobe share price jumped sharply in June when the company reported its Q2 earnings. Overall revenue rose 10% year-over-year to $5.31bn, driven largely by a 11% increase in its digital media revenue to $3.91bn.

The digital media segment includes Creative Cloud, which has been enhanced by Firefly, a machine learning model trained on billions of images. Adobe expects the demand for AI-infused products to continue to grow in Q3 and Q4.

“What’s really driving the quarter big picture continues to be the innovation that we’re delivering and the way AI is actually making our applications both more affordable [and] easy to onboard,” said Adobe CEO Shantanu Narayen on the Q2 earnings call.

While not a direct competitor to Adobe, Autodesk’s [ADSK] Q2 results showed strong demand for its design software, as industries from architecture to animation look to improve their workflows with AI and machine learning.

Source: Yahoo Finance

Adobe does appear to be more expensive than fellow software-as-a-service stocks Autodesk and Salesforce [CRM] given its higher P/S ratio. However, it has a healthy growth rate over the next couple of fiscal years. A promising Q3 report, with strong AI numbers, could potentially see the estimated sales growth revised upwards.

ADBE Stock: The Investment Case

The Bull Case for Adobe

The good news for Adobe is that it looks like more and more customers are willing to pay extra for services like Firefly, which costs $4.99 per month on top of an existing Creative Cloud subscription.

Deutsche Bank Managing Director Brad Zelnick has had conversations with Adobe customers during which he has “heard of the company more meaningfully expanding contracts upon renewal, driven by Firefly uptake… and additional products like Acrobat AI Assistant”.

Customers are generally willing to pay a slightly higher subscription fee because tools like Firefly and Acrobat AI Assistant offer tangible value, Zelnick wrote in a note seen by Investor’s Business Daily.

Adobe is one of the few software companies “successfully monetizing generative AI use cases today”, Zelnick added. A positive earnings report on September 12 could consolidate ADBE stock as a generative AI “winner”.

The Bear Case for Adobe

Beyond the obvious bear argument that AI stocks are in a bubble, Adobe’s Firefly is seeing increasing competition from the big tech stocks Microsoft [MSFT] and Alphabet [GOOGL], as well as the likes of OpenAI and Midjourney.

The AI image generation market is expected to be worth $60.8bn by 2030, growing at a CAGRof 38.2%, according to a report by MarketsandMarkets released in August.

It is crucial that Adobe continues to fine-tune and improve Firefly. If customers feel that there isbetter value for money elsewhere, then the company’s share of the AI image generation market could shrink, which could potentially have an impact on future subscription numbers.

Conclusion

Adobe can be considered an undervalued and underappreciated stock in the AI theme. While there could be headwinds from fierce competition in the AI image generation market, if the company can keep improving its AI offerings then it may be able to continue growing its digital media and subscription revenue.

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