Thanks to artificial intelligence (AI), software giant Adobe (ADBE 1.53%) has been on a tear. The stock is up by more than 60% since the beginning of the year as investors have taken a greater interest in its AI-driven applications.
The increase has taken Adobe's market capitalization to around $240 billion. Still, the question for investors is whether that market cap can reach $1 trillion by 2030, seven years from now. Let's examine that path to growth for some insights into Adobe's prospects for reaching this goal.
The path to $1 trillion
At $240 billion, Adobe's market cap has to double slightly more than twice for it to reach $1 trillion. Over seven years, achieving that feat means the stock price needs to rise at a 23% average annual growth rate during that time.
If the last year is any indication, that is an achievable feat. During the previous 12 months, the stock price rose by almost 80%. However, this was a time when the stock was coming out of the most severe bear market since the 2008-09 financial crisis. Going back five years, the stock has risen by only 106%, a rate that would not take Adobe stock to $1 trillion.
But go back seven years, and the rate of increase is just under 400%. If Adobe maintains the current pace for another seven years, its market cap should easily make it above $1 trillion by 2030.
Ultimately, that uneven growth shows that past performance is an unreliable indicator of the speed of Adobe's journey to $1 trillion. Still, it serves as a reminder that investors should expect periods of both growth and retrenchment in the stock during that time.
Adobe's path to growth
On the software front, Adobe continues to prove its staying power. Users have relied on its PDF documents for decades, driving sales of its Document Cloud. Also, products like Photoshop and Illustrator are part of its Adobe Creative Cloud, which has served as the platform of choice for millions of creative workers.
That creativity has gone to the next level with Adobe Firefly, its generative AI product offering features like photorealistic images, text effects, and 3D enhancements. But the enhancement that really supercharged investor interest is a partnership with Nvidia, which can leverage the power of that company's GPUs in the creative process.
Unfortunately, that added functionality has not translated into massive financial gains. In the first nine months of fiscal 2023 (ended Sept. 1), revenue of $14 billion rose 10% compared with the same period in fiscal 2022.
Amid rising expenses, net income for the first three quarters of fiscal 2023 matched the 10% increase as it came in at $3.9 billion. Moreover, with the company's outlook, the revenue growth rate is on track to stay the same. Those results will likely lead shareholders to question how much AI has and will boost the top and bottom lines.
Furthermore, Adobe's P/E ratio is 48, up from 29 a year ago. That multiple expansion appears overdone considering the company's relatively slow growth rate. Additionally, such a valuation makes another 60% increase in the stock price unlikely and could even mean a near-term stock price decrease if signs of improvement do not appear.
Adobe in 2030
Given current growth rates, Adobe is unlikely to achieve a $1 trillion market cap by 2030. Admittedly, Adobe's software is indispensable to businesses, especially those in the creative industries. For this reason, the SaaS stock has typically outperformed the S&P 500 over long-term time horizons, and that trend will probably continue.
However, with net income growth significantly lagging the 23% threshold needed, investors should not expect a $1 trillion market cap until much later than 2030.
