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Artificial intelligence (AI) has been the predominant investing theme ever since Nvidia (NVDA) released that monstrous beat in its fiscal first-quarter 2024 earnings report in May 2023. Since then, the market, particularly tech companies, has been divided into two halves. The first are companies that are seen as net AI winners and saw their valuations soar. Nvidia was the flagbearer of this trade until a few months back, and its market cap soared to over $5 trillion. The Jensen Huang-led company became the world's most valuable company in the process, something not many envisioned — at least not so soon — before AI really took off.
At the other end are companies perceived to be net losers from AI. These include software companies and IT services firms relying on "man-hour" models. Basically, these are companies whose very business model is at risk as AI models automate many tasks.
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Meanwhile, "AI-pocalypse" fears have eased, and names like Accenture (ACN) and Adobe (ADBE) have rebounded from their 2026 lows. However, Adobe has fallen nearly 15% from the highs hit earlier this month. In my previous article, I noted that it would be prudent to take profits off the table after the sharp rally in ADBE stock. With the stock now coming off those highs, let's explore why it is a "Buy" now, particularly amid the chatter around pausing advanced AI development.
To begin with, I believe it is highly unlikely that U.S. companies would pause advanced AI development. First, there is mutual distrust between the various companies building AI, and given how important the technology could become in the years ahead, there would always be suspicions of companies secretly working on advanced models. Moreover, U.S. AI companies are also competing with Chinese companies, which are often accused of copying U.S. technology. Think of it this way: despite various treaties, the U.S. and the former Soviet Union secretly continued to work on nuclear weapons during the Cold War. We now have a new cold war/tech war between the U.S. and China, and neither would want to lag in advanced AI buildout.
Coming back to ADBE, it fell after its fiscal Q3 2026 earnings report earlier this month, despite a "beat and raise" quarter. The company beat on both the top and the bottom line and raised its revenue guidance. However, adjusted for the Q3 beat, Adobe actually lowered the annual guidance, which the company attributed to forex headwinds in the current quarter.
Digging deeper into the earnings, Adobe's remaining performance obligations (RPOs) grew 8% year-over-year in the quarter, which was the first time since fiscal 2023 that the metric grew in single digits. Adobe's annualized recurring revenue growth is also slowing down, and the company expects it to rise 10.2% in the current fiscal year. The company is pivoting to a freemium model and expects this to weigh on ARR growth in the short term. The ARR of the AI business is growing fast, though, and it rose 150% in fiscal Q3. However, at $650 million, it is a tiny fraction of Adobe's consolidated ARR of $27.5 billion.
Adobe also announced that Anil Chakravarthy would become the next CEO effective December 1. He would take the baton from long-time CEO Shantanu Narayen, who announced his departure during the fiscal Q1 earnings call. Meanwhile, Chakravarthy's selection was perplexing for at least a section of the market. In his note, Jefferies analyst Brent Thill said that company veteran David Wadhwani, who was the President of Adobe's global Creativity & Productivity business, was seen as "the rational choice." Meanwhile, Wadhwani announced his departure on the same day that Adobe announced Chakravarti as the next CEO. Jefferies expects further organizational changes as "Anil reshapes the organization."
Adobe has seen a lot of churn in top leadership and is currently headhunting a new CFO after Dan Durn departed the company to join Marvell Technologies (MRVL).
While Chakravarthy has yet to outline plans to steer the company amid the AI disruption, many observers believe an external hire with deeper knowledge of the AI domain would have been a better choice.
While most analysts have raised Adobe's target price this month following the Q3 conference call, Jefferies and JPMorgan Chase lowered their respective target prices. Overall, of the 38 analysts polled by Barchart, 23 rate ADBE as a "Hold" while nine rate it as a "Buy" or equivalent. The remaining six rate Adobe as a "Sell," and its mean target price of $269.70 is just about 7.6% higher than current prices.
After the recent correction, Adobe's valuation has come down, and it trades at around 11x the $22.64 earnings per share (EPS) analysts expect it to post next fiscal year. The price-to-earnings (P/E)-to-growth multiple has also fallen below 1x. I find the valuations reasonable here, and the risk-reward has started to look a lot more favorable versus when I last covered the stock. While "AI pause" talks might not go much further, I see ADBE as a "Buy" at these levels.
On the date of publication, Mohit Oberoi had a position in: NVDA. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
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