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Adobe shares soared about 14% higher on June 14 in response to a positive fiscal fourth-quarter earnings report. Adobe’s latest round of results suggests the software giant has the necessary elements to monetize generative artificial intelligence (AI) applications. Nearly all sell-side analysts on Wall Street raised their price target on the stock.
Analyst Michael Turrin has increased his bank’s price target for Adobe, raising it to $700 from $675 per share. This adjustment suggests a potential 33% increase in Adobe’s stock value, contingent upon broader market sentiment aligning with Turrin’s optimistic view.
Investors should exercise caution, however, as sell-side analysts like Turrin may revise their ambitious price targets downward if expectations are not met. Recovering from potential losses due to misguided investment decisions can prove challenging.
Therefore, it is prudent to carefully evaluate both the reasons supporting an investment in Adobe and the challenges it currently faces before making a decision to buy.
Potential Benefits of Investing in Adobe
As a professional content creator, having an Adobe Creative Cloud subscription is often essential for livelihood. A substantial community of creative professionals simplifies the process of launching new products. 
For instance, Adobe’s recent AI tool, Firefly, which debuted in March, has already generated over 9 billion images integrated into Adobe’s suite of creative applications.Beyond content creators, Adobe’s software serves a broader audience.
With over 3 trillion PDF files globally, Adobe’s Acrobat AI Assistant has become a preferred tool for analyzing and creating these files. In the second quarter, revenue from Adobe’s Document Cloud grew by 19% year over year, underscoring its significant role in driving new business.
This growth has positioned Adobe to outpace industry leader Docusign. Docusign reported a modest 7% year-over-year revenue increase during its fiscal first quarter, which concluded on April 30.
Adobe does not distribute dividends to its shareholders; instead, it allocates profits through share buybacks. Over the last three years, it has decreased its number of shares by 6%. In the second quarter alone, Adobe repurchased 4.6 million shares.
Reasons to Approach with Caution
Adobe’s attempt to purchase Figma, the company behind the increasingly popular collaborative interface design tool of the same name, unraveled late last year. Adobe had to pay a $1 billion fee for terminating the acquisition and withdrew when government regulators blocked the deal.
Adobe’s software is highly regarded across various content creation sectors, yet it operates within a competitive landscape. Without acquiring Figma, Adobe XD’s prospects are less optimistic. Additionally, Adobe’s longtime staple, Photoshop, faces significant competition from Canva and its user-friendly, free-to-use image editing solution.
While Adobe’s shares are not at the excessively high valuations seen last year, they remain expensive at approximately 29 times the midpoint of management’s adjusted earnings forecast for 2024. If the company’s reported deceleration in revenue growth persists after some initial gains driven by AI, the stock could face substantial downward pressure.
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