The artificial intelligence (AI) arms race will disrupt some companies, while others will rise and become new industry standards. One company that investors are worried will have its business disrupted is Adobe (ADBE 1.95%). However, I think that fear is overblown.
If you examine Adobe's performance and consider the kind of work it does, it's clear that AI will bolster its business, not replace it. As a result, I think it's an excellent beaten-down stock to buy right now.
Image source: Getty Images.
Adobe hasn't lost its market position to generative AI
Adobe's suite of digital media design products has a wide following globally. It's the industry standard for a reason. Instead of rejecting AI, Adobe embraced it and launched Firefly AI. That generative AI product has become a popular option and is adding a ton of people to the Adobe ecosystem. On the company's fiscal second-quarter earnings call this month, management said that the Firefly App grew its first-time subscribers by 30% quarter over quarter. That's impressive growth, and the rest of Adobe's results show it's doing just fine in an environment driven by AI innovation.
NASDAQ: ADBE
Key Data Points
In its fiscal 2025 Q2, which ended May 30, Adobe's revenue rose by 11% year over year. While that's not incredible growth, it is plenty for a company of Adobe's maturity. Investors should be focused more on its profit growth, where Adobe put up excellent results, as usual. Earnings per share rose 13%, from $3.50 in the prior-year period to $3.95. That beats the broader market's 10% per year long-term average total return rate.
Adobe's best chance to outperform the market over the long term could be a steady string of quarters of low double-digit percentage earnings growth. If it can deliver that, it could be a great investment to balance out some of the higher-risk, higher-growth-potential companies in your portfolio.
The stock is priced cheaply relative to its expected growth
Thanks to all of the pessimism baked into Adobe's stock price today, it's trading at a fairly cheap valuation of 18.4 times forward earnings. That compares to the S&P 500 (^GSPC +0.58%) index's average level of 22.9.
ADBE PE Ratio (Forward) data by YCharts.
Adobe will likely incrementally outgrow the market each year. For example, in its fiscal 2026, Wall Street analysts project 9.5% revenue growth and 12.5% earnings-per-share growth. As such, at this discounted valuation, the stock seems like a great investment opportunity for patient investors.
Adobe has transformed into a steadily growing company that generates a ton of cash flow that it can use to repurchase shares. As long as investors aren't expecting it to be a rocket ship growth stock, and are content with buying shares at a low price and steadily adding to their Adobe position while its valuations remain attractive, the stock should be an excellent one to buy and hold.
If at some point it starts losing the AI battle with another digital media start-up, that could be a sign to sell the stock and move on. However, this isn't happening yet, so I think Adobe is still a great stock in the current market environment.
