Despite recently beating Wall Street's expectations in its fiscal 2024 first-quarter earnings report, Adobe (ADBE 0.87%) has fallen roughly 12% after guiding for "only" 9% revenue growth at the midpoint of management's guidance for the current quarter.
This outlook disappointed investors, leading to a slew of price target cuts from analysts worried that Adobe's price-to-free cash flow (P/FCF) ratio of 35 is too lofty, considering its slowing sales growth. Motley Fool contributor Travis Hoium expressed similar sentiments.
However, one analyst at DA Davidson, Gil Luria, thinks otherwise, maintaining his price target of $685. Bolstered by 16% growth in remaining performance obligations (RPO) and unrelenting product innovation courtesy of generative artificial intelligence (AI), Adobe still offers 37% upside, according to Luria.
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Adobe's AI opportunity
Integrating a rapidly growing array of AI use cases across its Creative, Document, and Experience Clouds, Adobe has positioned itself to thrive amid the technological revolution. Whether it's Adobe's AI Assistant within Acrobat and Reader, Firefly (its creative generative AI models), or GenStudio -- an enterprise-grade AI offering -- the company promises not to be left behind on today's investing megatrend.
One example highlighting the widespread adoption of Adobe's offerings: Over 80% of entrants to the Sundance Film Festival used one or more of the company's products.
Is Adobe a buy?
Although the company trades at 35 times free cash flow (FCF) as of this writing, this figure drops to 30 after adjusting for the one-time fee of $1 billion tied to its failed Figma acquisition. While Luria's price target of $685 -- based on forecasted 2025 earnings -- is lofty at 41 times FCF, Adobe looks like a good candidate for dollar-cost-averaging.
With that strategy, investors can get some skin in the game on a potential $1 trillion company without going "all in" at one price.
