Adobe Dips 11% YTD: Should You Buy, Sell or Hold the Stock?

Core Viewpoint - Adobe's shares have declined 10.9% year to date due to intense competition in the AI and Generative AI sectors, particularly from Microsoft-backed OpenAI, and a lack of monetization of its AI solutions [1] Group 1: AI Business Performance - Adobe's AI business generated over $125 million exiting the first quarter of fiscal 2025, which is a low single-digit percentage of total revenues of $4.23 billion [1] - The company expects its AI business to double by the end of fiscal 2025 [1] - Compared to competitors, Adobe's AI business is small; Microsoft, Alphabet, and Synopsys have significantly larger AI operations [2] Group 2: Share Price Performance - Year to date, Microsoft and Synopsys have outperformed Adobe, with their shares declining 7.3% and 8% respectively, while Alphabet has dropped 14.3% [3] - Over the trailing 12 months, Adobe shares have fallen 21.5%, while Alphabet returned 7.5%, and Microsoft and Synopsys shares fell 7.1% and 21.9% respectively [3] Group 3: Valuation Metrics - Adobe's stock is considered expensive, with a Value Score of D indicating a stretched valuation; it trades at a forward price/sales ratio of 7.12X compared to the sector's 5.72X [6] Group 4: Future Growth Prospects - Adobe is expanding its AI portfolio with new offerings like Adobe GenStudio and Firefly Services, aimed at enhancing collaboration on marketing campaigns [10] - The company plans to monetize Firefly through multiple Creative Cloud offerings and invest in sales capacity across various sectors [11] - Adobe's Digital Media Annual Recurring Revenue is expected to grow roughly 11% for fiscal 2025, with total revenue guidance set between $23.30 billion and $23.55 billion [13][14] Group 5: Earnings Estimates - The Zacks Consensus Estimate for fiscal 2025 earnings is $20.42 per share, indicating a 10.86% growth from fiscal 2024 [15] - Adobe has consistently beaten earnings estimates in the past four quarters, with an average surprise of 2.53% [16] Group 6: Investment Outlook - Adobe's focus on Generative AI and its innovative portfolio are seen as key growth catalysts, although the current valuation may deter value-oriented investors [18] - The stock is trading below its 50-day and 200-day moving averages, indicating a bearish trend [18]