Here’s a technology stock that definitely needs to be on your watch list. Adobe (NASDAQ:ADBE) is known as a software company, though it’s also involved with cloud computing. While Adobe stock should reward patient shareholders over the long term, it’s prudent to wait until the stock is trading at a lower, better price.
The good news about Adobe is that the company is getting serious about generative artificial intelligence. The bad news is that Adobe appears to be very richly valued, and the company has to contend with a government lawsuit. So, investors should weigh the positives and negatives, and can allow the share price to decline before taking a long position.
Adobe Jumps Headfirst Into Gen-AI
Adobe reported record revenue of $5.31 billion in fiscal 2024’s second quarter. However, to stay competitive, Adobe must continuously improve its products. In 2024, this means adding AI functionalities.
Adobe is enhancing multiple products with the company’s Firefly generative AI models. For example, content creators and developers can now enjoy a gen-AI-enhanced experience with Adobe Content Hub.
Furthermore, for everyday users of the popular Adobe Acrobat product suite, Firefly-powered gen-AI features will make it easier to generate and edit images. In addition, Adobe offers a “conversational engine” called Acrobat AI Assistant with new features.
The improved iteration of Acrobat AI Assistant will enable “customers to ask questions, get insights and create content from information across groups of PDFs – and other document types.” Clearly, Adobe is stepping up its AI game and this should inspire confidence in Adobe’s long-term investors.
Legal and Valuation Concerns for Adobe
As you can probably tell, I like Adobe as a tech-focused, growth-oriented business for the long term. However, there are a couple of major concerns about Adobe.
First, Adobe has a legal albatross, so to speak. The Federal Trade Commission is suing Adobe, claiming that the company is making it difficult for customers to cancel their subscriptions.
Samuel Levine, director of the FTC’s Bureau of Consumer Protection, alleged that Adobe “trapped customers into yearlong subscriptions through hidden early termination fees and numerous cancellation hurdles.” Adobe plans to challenge the FTC’s allegations in court, but it can be quite costly to contest a government lawsuit.
Then, there’s the valuation issue. I mentioned Adobe’s record quarterly revenue, but there’s a potential problem. Adobe has a GAAP trailing 12-month price-to-sales ratio of 12.36x. For comparison, the sector median P/S ratio is 3.09x.
Thus, it appears that the market has already factored Adobe’s impressive sales into the share price. So, now let’s consider an approach that prudent investors can take.
Here’s the Right Price to Buy Adobe Stock
Adobe is a successful software business that’s taking gen-AI seriously. Sooner or later, you’ll probably want to put a few Adobe shares in your long-term portfolio.
Yet, there’s no need to rush into a hasty investment. It’s wise to wait for Adobe stock to fall to $450 before starting a share position. Then, the risk-reward balance will be more favorable and you can take a stake in Adobe with more confidence.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.