Since the release of generative AI platforms like ChatGPT, artificial intelligence (AI) has been a hot topic just about everywhere. Within the world of investing it has been especially prominent as analysts, executives, and individual investors try to determine where this new technology might enhance or disrupt particular industries or businesses.
As with most new things, publicly traded companies have been in a rush to demonstrate their AI credentials, with mentions of AI increasing on earnings conference calls. For some companies it's a stretch to find genuine AI use cases. For others, it's a legitimate part of the business strategy, and has been long before AI was in the mainstream consciousness. Creativity and business productivity software company Adobe (ADBE 1.11%) falls into the latter category and has legitimate use cases for AI. The question for investors is if this makes the stock a buy, or if the hype is inflating the share price.
How does Adobe use AI?
In March of 2023, Adobe released its Firefly family of generative AI models. Over the months since the announcement, the company has added Firefly capability to more of its products. Firefly allows creators to use text to create what they need. For example, a user could type in a prompt like "cat wearing a fedora" and Firefly can create that image.
For users who don't want to outsource that level of creativity, Firefly can also save time by automating time-consuming tasks like filling in a background or applying a texture to an image. These productivity tools could be especially helpful to creators who are on tight deadlines.
While some amount of access to Firefly is available for free, eventually users have to pay a subscription to continue to use these AI features. Adobe says that over two billion images have been generated by its users in the first six months Firefly has been available. While this is an impressive debut, it remains to be seen how many users will subscribe to this AI feature, and what kind of revenue it can generate.
What should investors know about Adobe's use of AI?
Right now Firefly is being integrated into programs within the company's Creative Cloud like Photoshop and Illustrator, but there are additional opportunities for AI in other parts of Adobe's business, like its Digital Experience products. We should expect to see Adobe continue to integrate AI into as many of its products as it can.
The real question for investors is how much value this really adds to the business. The stock is up 32% over the past six months, during which time the company has continued to release more AI features in its products. While it's impossible to say with certainty that the stock price appreciation is due to the AI hype, it's not outside the realm of possibility.
Adobe stock currently trades for a price-to-earnings (P/E) multiple of 46, which is expensive when compared to the S&P 500's P/E ratio of 23. However, Adobe's average P/E over the last five years is 48, so today's valuation is not far off that mark.
Is the stock a buy?
Adobe is not a cheap stock, but it rarely is. The question for investors is whether AI will be a significant growth driver, or have a marginal impact on the financial results. While I think the generative AI features will be useful for users, I'm not yet convinced this changes the thesis for investing in Adobe. Will new users come to Adobe because of AI? Or will it just be a nice perk for current users?
In my opinion, investors should buy this stock because Adobe is the clear leader in the creative software space. This has resulted in a moat for the company that it has developed and reinforced over decades. The AI use cases are legitimate, but I'm not yet convinced they'll move the needle for the company.
