Adobe ADBE, a titan in the Portable Document Format (PDF) technology, has been facing macroeconomic and competitive challenges this year, with its stock price plummeting 12.4% in the year-to-date period against the Zacks Computer-Software industry, the broader technology sector and the S&P 500 index’s returns of 14.8%, 22.2% and 19.6%, respectively.

Year-to-Date Price Performance

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This loss has left investors and analysts questioning the company’s future prospects. However, amid this downturn, Adobe’s strengthening Generative Artificial Intelligence (GenAI) drive is emerging as a potential catalyst for a much-needed recovery.

ADBE’s strong positioning in the digital content and marketing industry on the back of its robust cloud-enabled products and growing GenAI capabilities has been boosting its business prospects.

Expanding GenAI-Powered Solutions Drive ADBE’s Prospects

Adobe is constantly riding on the solid momentum in its family of creative, generative AI models, namely Firefly.

Its unveiling of the Firefly Image 2 Model, Firefly Vector Model and Firefly Design Model to mark a significant advancement in its creative generative AI model family, enhancing creative control, image quality and illustrator capabilities, is a major positive.

Adobe recently introduced the new Firefly Video model, which is marked as another positive.

With Firefly innovations and integrations, ADBE has exceeded 12 billion generations since the launch of Firefly. This is marked as an important milestone.

The company enhanced features of Acrobat AI Assistant to allow customers to ask questions, get insights, and create content from information across groups of PDFs and other document types, including Microsoft Word, Microsoft PowerPoint and text files. It also introduced enhanced meeting transcript capabilities in AI Assistant.

Adobe’s growing efforts to expand content creation in Adobe Acrobat are noteworthy. It integrated Adobe Firefly image generation into its Edit PDF workflows. It has optimized AI Assistant in Acrobat to generate content fit for presentations, emails and other forms of communication.

Adobe also offers Adobe Express Platform AI Assistant, which is capable of answering technical questions, automating tasks, simulating outcomes and generating audiences seamlessly.

The launch of Generative Remove in Adobe Lightroom, which is a powerful Firefly-backed tool that helps remove unwanted objects from any photo in a single click in a non-destructive manner, is a plus.

The introduction of Adobe Express for Enterprise, which is powered by Firefly Image Model 3, is driving the company’s momentum among various enterprises.

Strong Customer Base Drives ADBE’s Growth

A solid portfolio and differentiated approach to AI are attracting an expanding universe of customers across Adobe’s segments.

International Business Machines IBM is one of the notable customers leveraging Adobe Firefly.

Adobe’s other key customer wins include Johnson & Johnson, Mayo Clinic, Home Depot, Dentsu, TD Bank, Newell Brands, Alphabet’s Google, MediaMonks, Meta, U.S. Navy, PepsiCo, Estee Lauder, Disney, RedBull, Amazon, KPMG, U.S. Treasury Department and Charles Schwab.

ADBE’s Impressive Projections & Rising Estimates

Strong customer momentum, along with solid Firefly momentum, is expected to boost its near-term as well as long-term prospects.

For fourth-quarter fiscal 2024, Adobe projects total revenues between $5.50 billion and $5.55 billion. The Zacks Consensus Estimate for the same is pegged at $5.54 billion, indicating growth of 9.8% year over year.

Management expects non-GAAP earnings per share between $4.63 and $4.68. The consensus mark for the same is pinned at $4.66, indicating growth of 9.1%. The estimate has been revised upward by a penny over the past 30 days.

For fiscal 2024, the Zacks Consensus Estimate for revenues is pegged at $21.44 billion, indicating year-over-year growth of 10.5%.

The consensus mark for fiscal 2024 earnings is pegged at $18.26 per share, suggesting year-over-year growth of 13.6%. The estimate has been revised upward by 0.6% in the past 30 days.

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Macro Headwinds & Stiff Competition: Challenges for ADBE

However, a challenging macroeconomic environment, with high oil prices and elevated interest rates, remains a concern for Adobe. Fears of a looming U.S. recession are certainly major concerns. The ongoing Russia-Ukraine war also does not bode well for the company’s business.

Moreover, ADBE faces stiff competition in the AI software space from other tech giants and well-funded startups like Stability AI and Midjourney.

Intensifying competition might cause the returns from its AI push to take longer to materialize, which does not bode well for the stock.

ADBE Stock Overvalued

ADBE stock is not so cheap, as the Value Score of D suggests a stretched valuation at this moment.

In terms of the forward 12-month Price/Sales ratio, Adobe is trading at 9.92X, higher than the industry’s average of 7.84X.

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Conclusion

Adobe’s deepening GenAI focus and innovative GenAI-powered portfolio present a compelling opportunity for long-term investors. Its upward estimate revisions also bode well.

However, macro uncertainties and stiff AI competition are negatives for the stock. Also, its stretched valuation and Growth Score of C make it a risky bet at present.

ADBE currently has a Zacks Rank #3 (Hold), suggesting that it may be wise to wait for a more favorable entry point in the stock.

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