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Adobe (NASDAQ:ADBE) stock is down 33% over the past year. Even though it’s a familiar name for many of us who use the company’s products, the share price performance has been underwhelming. Yet when I consider the fundamentals of the business and where we could go next year, I think it has a strong case for being a bargain buy right now.
Recent underperformance
One concern that has weighed on the stock is AI uncertainty amid rising competition. Investors worry that generative AI threatens incumbents (I prefer the phrase old-school) like Adobe. Of course, Adobe is investing heavily in integrating AI (more on that later), but some investors still feel it won’t be enough to retain the same level of market share.
Another factor has been valuation. Last year, the stock was close to all-time highs, with a very high price-to-earnings (P/E) ratio. We’ve seen the share price fall this year as a healthy reaction to it getting a more sensible valuation. High-growth tech stocks can experience sharp corrections in the short term, but this doesn’t mean that the long-term vision has been fundamentally derailed.
The picture right now
The share price correction now means the P/E ratio is 20.91. By comparison, the Nasdaq 100 average P/E ratio is 34.71. I believe the US stock offers good value compared to other large tech companies. It’s also a good indication that the sell-off could be coming to a close, as there will come a point when it’s simply too cheap for investors to ignore.
Unlike some other competitors, Adobe has a robust subscription model that generates predictable revenue. The latest results from September showed a record revenue haul, showing momentum here. Another benefit of this business model is its high free cash flow, which allows it to invest in new projects without relying on high debt levels to operate.
Coming back to AI, it’s true the company was a bit slow out of the blocks. However, it’s really catching up, embedding generative AI (Firefly-style assistants) across creative and experience products. It now refers to itself as “the leader in the AI creative applications category”. AI-influenced annual recurring revenue passed $5bn in the most recent quarter. If adoption ramps in the coming year, I think it’s a hard stock for anyone to ignore.
An attractive option
A concern looking forward is how well it can continue to monetise AI. There’s a big difference between building features and getting clients to pay for them. But recent results give me a strong impression that it can really boost revenue from this key source.
In contrast to some other AI-related companies, Adobe looks excellent value right now. I can’t say for certain if it’s the number one bargain buy of this year, but I think it’s a top contender. I’m seriously considering adding it to my portfolio, and I feel that other investors could think about doing the same.
