How High Will Adobe Stock Rise?

Adobe (ADBE) is among the top-performing tech stocks in the last decade, rising over 1,000% and delivering outsized gains to investors in this period. Valued at a market cap of $217 billion, Adobe stock has already returned 40% to investors in 2023. But it's also down 31% from all-time highs due to the pullback experienced in 2022. 

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So let's see if it makes sense to invest in ADBE stock right now. 

What Does Adobe Do?

Adobe is a diversified software company that offers a portfolio of products and services used by professionals, including content creators, designers, marketers, and businesses. These products are licensed to end users through app stores and Adobe's own website. A majority of its products are offered via a software-as-a-service (SaaS) model or a managed services model, in addition to term subscription and pay-per-use models. 

Adobe’s products can be used across devices such as personal computers, smartphones, and tablets. With operations all around the world, Adobe has managed to increase its sales from $11.1 billion in fiscal 2019 to $17.6 billion in fiscal 2022 (ended in November). 

Adobe is Betting Big on Artificial Intelligence

The share prices of companies part of the AI (artificial intelligence) space have been on an absolute tear in 2023, delivering market-thumping gains to investors. Adobe is also investing in AI to benefit from a first-mover advantage and gain traction in a rapidly expanding addressable market. 

In March 2023, Adobe launched Firefly, which is a “family of creative generative AI models” focusing on image generation and text effects. Adobe emphasized Firefly can be easily integrated with products such as Creative Cloud, Document Cloud, and Experience Cloud. 

Moreover, the company introduced generative AI innovations across Adobe Experience Cloud to disrupt the way enterprises deliver customer experiences. The Adobe Sensei GenAI will leverage the capabilities of large language models or LLMs, allowing creators to increase productivity without having to increase workloads. 

Following the launch of these products, Well Fargo analyst Michael Turin upgraded ADBE stock to “overweight” from “equal weight” and increased the price target to $525 from $420. Analysts from Citi (C) and TD Cowen (TD) also raised price targets, according to MarketWatch. Citi increased its price target for ADBE stock to $462 from $365, while TD Cowen has a price target of $500, up from $415. 

Adobe to Report Fiscal Q2 Earnings This Week

A key near-term driver of ADBE stock will be its upcoming earnings, which is expected to release this Thursday. Analysts expect Adobe to report revenue of $4.43 billion in fiscal Q2 Of 2023, an increase of 1% year over year. Comparatively, its adjusted earnings might grow by 11% to $3 per share in the quarter ended in May. Additionally, Wall Street expects its sales to rise by 1.8% to $17.9 billion, and earnings might grow 12% to $12.3 per share in fiscal 2023.

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So, ADBE stock is priced at 36x forward earnings and 12.3x forward sales, which is quite steep. For instance, the S&P 500 index is priced at less than 20x forward earnings. Adobe sales were up 12% year over year in fiscal 2022 and 23% in fiscal 2021. The massive deceleration in top-line growth coupled with macro headwinds dragged ADBE stock significantly lower last year. 

What Next for ADBE Stock and Investors?

Adobe raised eyebrows after the company announced its intention to acquire Figma for a whopping $20 billion, Figma was a direct competitor to Adobe and will allow the latter to onboard customers in verticals such as digital media and design. 

Figma ended 2022 with annual recurring revenue of $400 million, which indicates the acquisition was priced at 50x trailing sales. It suggests Adobe paid a hefty premium to acquire a competitor. The deal might close by the end of fiscal 2023 if regulators approve the acquisition. 

While the AI segment is heating up, Adobe will have to monetize products, including Firefly and Sensei GenAI, successfully. Adobe is a major player in the digital media segment, which is forecast to remain stable over the long term. It continues to widen its portfolio of products and services, resulting in higher customer retention and engagement rates. 

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However, the high valuation metrics of ADBE stock remain a concern. Out of the 23 analysts covering ADBE stock, 10 recommend a “strong buy,” 1 recommends a “buy,” and 12 recommend a “hold.” The analysts have a 12-month average target price of $409.95 which is 13% lower than its current trading price. 

I too believe the risk-reward profile for Adobe is not compelling enough for investors to buy the tech stock at its current price. AI-powered tech stocks, including Adobe, are overbought and are likely to experience a sell-off dragging valuations lower across the board. 

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On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.