Why Adobe’s Commitments to AI and ESG Underline Potential for a Stock Market Rebound

5 Jun 2024

The first half of 2024 has been a challenging period for Adobe (NASDAQ:ADBE) stock, with a sharp decline of around 20% punctuating the past six months. However, investors can look to future innovations and the software giant’s exemplary ESG reputation as a solid foundation for a long-term market recovery.

Adobe is a growth stock that remains popular despite its recent shortfalls. Nasdaq-listed firm recently featured among the most searched stocks on Zack.com, highlighting higher levels of retail interest in the company.

Crucially, Adobe’s performance in the wake of the pandemic shows a firm that’s yet to fully recover from the widespread tech stock sell-offs that swept through Wall Street in 2022.

Even despite recent downturns, Adobe stock remains almost 70% higher from its entry point in Q3 2019. However, at around 33% below its 2021 market peak, investors can take optimism from there being plenty of market capitalization to recover.

But how achievable is Adobe’s return to its former highs? Let’s explore the stock’s prospects alongside its current market performance:

AI Adoption Will Determine Adobe’s Trajectory

The implications of the ongoing generative AI boom for Adobe can’t be overstated. Generative tools have the potential to disrupt software as we know it, and its ability to create quality visual and multimedia content based on a series of user prompts puts it in direct contention with leading Adobe design tools.

In a recent meeting with analysts, Adobe claimed that the adoption of AI will help to expand the company’s addressable market. This expansion hinges on the successful growth of the firm’s AI software portfolio, and Adobe’s teasing of the creation of 3D images, audio, and video from text prompts points to a clear emphasis on commanding a strong generative AI market presence.

Worryingly for investors, Adobe faces an unprecedented level of competition in upgrading its design tools. Since OpenAI unveiled the text-to-video creation tool Sora, Adobe’s stock has collapsed more than 22%.

Despite the fierce competition, Adobe told analysts that the firm’s total addressable market will reach $293 billion by 2027, representing a strong increase on the $205 billion recorded in 2024. However, Adobe’s share of this addressable market is up for debate.

Last year, Adobe opted to walk away from an ambitious $20 billion acquisition of collaborative design startup Figma Inc. The termination of the merger left the firm with around $6 billion, which has been allocated toward advancing its AI development and stock buybacks.

This commitment to embracing generative AI is already paving the way for cutting-edge tools like Firefly, but converting these innovations into revenue and out-growing rivals will be a major challenge for the company.

Q1 2024 Earnings Outpace Estimates

Despite a difficult start to the year, Adobe’s Q1 2024 earnings beat Zacks’ Consensus Estimate by 2.3% and improved 17.9% year-over-year.

The firm’s revenues of $5.18 billion also outpaced the Consensus Estimate of $5.13 billion–highlighting Adobe’s resilience even as investors remain wary of the disruptive power of generative AI.

While much of Adobe’s top-line growth was driven by the relatively strong performance of Adobe Creative Cloud, Document Cloud, and Experience Cloud along with strong subscription revenues, the firm’s innovations in generative AI were also acknowledged as a key contributor.

ESG Credentials Could Drive ADBE Higher

As a long-time market leader in the field of software solutions and publishing tools, the emergence of competitors driven by the disruptive force of generative AI poses new challenges for Adobe.

While the firm has sought to embrace the GenAI boom with its own suite of innovations, the stock’s performance may become increasingly impacted by finer margins.

With this in mind, Adobe’s long-standing ESG commitments could help the software giant to continue winning investor interest ahead of the industry’s bright new startups.

“Adobe has achieved global gender pay equity and invested nearly $87 million in projects that benefit 1.6 million underrepresented minorities worldwide,” highlights Maxim Manturov, head of investment research at Freedom24.

“Half of Adobe's energy consumption comes from renewable sources, and the company aims to transition to fully renewable energy by 2035. MSCI upgraded Adobe's ESG rating from AA to AAA in December 2021.”

Does P/E Present a Risk or Opportunity?

It’s also important to consider Adobe’s relatively high price-to-earnings (P/E) ratio of 45.9x. While this would ring alarm bells for investors in a market where half of US-listed companies have a P/E of below 17x, it’s fair to consider ADBE an outlier rather than a bloated stock.

This higher ratio can be attributed to Adobe’s earnings-per-share, which is expected to grow by 22% per year for the coming three years at a rate that far outpaces the 10% growth forecasted for the wider market.

For bullish investors, Adobe’s P/E is reflective of a stock that’s seeking to cement its place as a software market leader by rolling out next-generation AI solutions that could see significant upside if it can see off the threat of its industry rivals.

Alongside this, the firm’s ability to consistently beat expectations even in times of market uncertainty, not to mention a strong ESG foundation that highlights the progressive culture surrounding the brand, can be seen as an excellent sign of resilience.

For Adobe’s stock, the level of competition entering its core industries will pose unprecedented challenges, but the opportunity to evolve into a major generative AI player could drive exponential growth while unlocking a market worth $293 billion over the coming years.