Investors have some high expectations for Adobe's (ADBE 0.87%) business. The software giant isn't growing quickly today, but Wall Street is excited about its potential as a central player in an approaching artificial intelligence (AI) boom.
Adobe is no slouch in the financial arena, either, recently posting strong earnings and cash flow metrics for its fiscal Q3. That performance helped keep the stock performing well in 2023. The stock is already trading more than 61% higher so far this year.
Let's take a closer look at the company's latest momentum to see if Adobe is still an attractive growth stock.
Adobe's got AI potential
Adobe's management team is clearly excited about the impact that AI could have on demand trends in the coming quarters. "We are unleashing a new era of AI-enhanced creativity with innovations across our product portfolio," CEO Shantanu Narayen said in a mid-September press release.
Thanks to the hype around the term today, it seems that most companies are claiming that generative AI will boost their businesses to new heights. But the difference in this case is that the functionality fits perfectly into many of Adobe's creative services.
These include the ability to seamlessly expand on photos and graphical documents with AI-generated content, colors, and text, to name a few examples. "These deep integrations deliver more creative power than ever before to customers," Adobe executives said during a recent conference call with investors.
Adobe is getting results
The AI lift hasn't supercharged Adobe's sales trends to date. Revenue was up 13% year over year in the most recent quarter, simply maintaining the growth rate from the prior one.
But integration of these new generative features in its cloud services is mainly about creating excitement and showing how AI can add value to products like Photoshop. The early trends are encouraging, with app subscriptions getting a boost from the buzz around AI features. Executives said over 2 billion images have been generated in the six months since Adobe launched Firefly, its showcase of generative AI graphics.
Meanwhile, shareholders have plenty of good news to celebrate on the financial front. Adobe generated $1.9 billion of operating cash flow just this past quarter and the company is sitting on over $7.5 billion of cash on its books. Unlike many other software-as-service specialists, Adobe is producing solid profits as well. Operating income over the last nine months rose to $4.9 billion from $4.6 billion a year earlier. That translates into a profit margin of roughly 34% of sales.
Before buying, do a price check on Adobe
Adobe's valuation is steep, though, suggesting investors might want to simply watch this stock for now. Shares are trading at about 13 times annual sales today, up from 9 times sales at the start of the year.
By comparison, you could own Microsoft, which is more profitable, for 12 times sales. The software titan is also expecting a boost in demand from AI integrations over the next several years, although an Adobe investment will likely deliver more targeted exposure to the generative AI boom.
Cautious investors might prefer the more diversified Microsoft investment today. However, if you don't mind taking on more risk, Adobe could still be a great addition to your portfolio. The business is generating plenty of cash and profits, and growth trends have a good chance of accelerating over the next several years.
While AI is often more about the hype than about concrete business impacts, Adobe is positioned well to use the emerging technology in a way that adds loads of value to its already popular subscription platforms. That's a recipe for further market-beating returns ahead.
