Adobe (NASDAQ:ADBE) stock is at a five-year low and trading at a forward price-to-earnings (P/E) ratio of 11. But could buying today be like investing in Meta at its 2022 lows?

Disruption?

There are definitely similarities. At its lows, investors were concerned that privacy changes on Apple devices were going to undermine Meta’s ability to deliver valuable targeted advertising.

Meta got around this by using artificial intelligence (AI) to help understand its users. But as of today, AI’s the risk that the stock market is worrying about with Adobe’s business.

The concern is that lower barriers to entry could create more competition. And this might result in either a loss of customers or an inability to keep increasing prices for the users it has.

That’s why the stock’s down around 64% from its all-time highs. But, like Meta in 2022, the company’s making good money and its core business is still growing.

Results

In its latest report, Adobe announced 12% revenue growth and a more than 300% increase in sales from AI-based products. And operating margins also remained strong. That hardly looks like a business going backwards. But there’s a bit more to the firm’s results than this – anyone concerned about the AI threat has plenty to focus on.

Adobe’s 12% revenue growth came in the context of a 20% increase in monthly active users. So the company is attracting new people primarily onto its free or low-cost tiers. No doubt the firm plans to turn these into higher-value customers over time. But the risk is that this isn’t going to be straightforward with a lot of AI-native competitors around. 

Outlook

Adding more users is a good thing for Adobe. But that only speaks to half of the concern investors have about the implications of AI for the business. Signing customers is one thing, but turning them into high-margin subscription revenue is another. And on that front, the real test is yet to come. 

I don’t think investors are going to have a clear answer to this question within the next year or so. I’m expecting more of the same – solid results surrounded by ongoing uncertainty. That makes it difficult to think about buying the stock in this situation. But that was also the case with Meta Platforms when it was trading at historically low multiples.

Am I buying?

The similarities between Meta in October 2022 and Adobe right now are striking: both stocks trading at historically low valuations despite the underlying businesses doing well. Meta obviously came through its challenges impressively and investors who bought the stock have done very well. But that doesn’t automatically mean Adobe can do the same.

The stock’s cheap, but there’s a lot of uncertainty I don’t think will become clearer any time soon. So I’m focusing on more obvious opportunities for the time being.

The post With a P/E ratio of 11, could buying this stock be like investing in Meta Platforms in 2022? appeared first on The Motley Fool UK.

A lot of investors are trying to focus on what’s happening with earnings. And while that isn’t a bad idea, they also need to think about what the numbers aren’t showing just yet.

AI in, software out

There’s a worry right now that AI’s going to disrupt software companies. But there’s been relatively little evidence of this – so far – in their earnings reports.  

The rise of AI creates two main challenges for software businesses. The most basic is that their customers might switch to cheaper alternatives that offer a largely similar product.

Even if that doesn’t happen though, another potential issue is that customers won’t be willing to pay as much for software subscriptions. And that’s what makes the industry so attractive.

As a result, stocks that have historically traded at high valuation multiples are now trading more moderately. But the big question is whether or not this is an overreaction. 

What disruption?

All of this sounds plausible, but bullish investors have been pointing out that there hasn’t been any sign of this happening yet. And they back themselves with charts like this one:

Source: Fiscal.ai

Adobe (NASDAQ:ADBE) shares have been hit hard by fears of AI disruption. But as we can see, revenues are growing and operating margins are still very strong.

That’s undoubtedly a very nice chart – the kind that a fund manager might be happy to show to clients. The trouble is, it doesn’t say much about the disruption risk. 

One reason is that most of it is about what happened before the rise of AI – revenue growth in 2017 implies almost nothing about 2026. But there’s a much more important one as well. 

Forward-looking

The stock market is naturally forward-looking. In other words, what matters to investors isn’t how much a company has been growing, but how much it’s going to grow. 

With Adobe, the concern is that disruption might not show up in the next year, but when it does it could potentially be huge for the business and its profitability.

A company’s previous performance can give investors an idea about what it’s likely to do. But this is usually the case only if things are likely to be largely the way they have been.

When something major happens, looking at what a business managed to do when things were different isn’t much help. And that’s why charts like the one above are of limited use right now.

What to do?

With Adobe, the big question is whether its entrenched position with designers can allow it to keep increasing its prices. I don’t know, but the answer isn’t in charts like this one. 

The risk’s hard to quantify accurately, which is why share prices are volatile. But at a price-to-earnings (P/E) ratio of 16, investors do get some compensation for taking it.

My view is that there are other software names with stronger competitive positions and those are the ones I’m buying. This is what investors need to think about – not just the numbers.

The post What the numbers aren’t telling investors about the S&P 500… yet appeared first on The Motley Fool UK.

Dissecting the news

Let’s first delve into the AI disruption story that’s swirling at the moment. Some investors worry that generative AI threatens Adobe’s core business (creative software). New AI tools from competitors (such as Anthropic and Canva) promise easier, cheaper creative workflows. The worry is that this could reduce demand for Adobe’s legacy subscription products, such as Photoshop. If this proves to be the case, it would have a serious negative impact on the company.

The other AI angle hurting the business right now is its ability to monetise innovations. Adobe is working hard on its own AI innovations, which it believes can boost profitability in the future. However, some are worried about the amount of capex being allocated here, given the limited results so far.

Banging the drum

Don’t get me wrong, these are risks going forward. The move lower in the share price shows these factors need to be taken seriously. However, the pessimistic view of the company’s long-term prospects is misplaced, I feel.

The latest quarterly results from December showed record revenue of $6.19bn, up 10% from the same period last year. If the company were really being overtaken by competitors and cheaper alternatives, the business wouldn’t be recording record figures like this.

The CEO commented that “by advancing our innovative generative and agentic platforms and expanding our customer base, we are excited to target double-digit ARR growth in full-year 2026.” So it’s clear the focus is on developing AI features to help not only retain but also expand customer acquisition. Of course, it remains to be seen if the expected growth in revenue materialises this year, but if it does, then I struggle to see how the stock won’t rally from the good news.

Finally, it now has a price-to-earnings ratio of 15.4. For comparison, the average ratio for the Nasdaq is 23.71. Based on this, I feel a lot of the bad news is already factored into the stock. It could be seen as undervalued relative to the tech-heavy index. So even if I’m wrong about my view, it’s hard to see how the share price could fall significantly from here, given the valuation.

Overall, Adobe isn’t a low-risk stock for investors. It clearly has some tough issues to navigate this year. However, I think the pessimism recently surrounding the company is really misplaced. If investors agree with my reasoning, it could be a good stock to consider adding to a portfolio.

The post Why I think people are wrong about Adobe stock right now appeared first on The Motley Fool UK.

However, while that’s fantastic news for anyone who’s been buying shares, fears are on the rise that the gravy train may soon come to an end. After all, the US economy’s currently riddled with uncertainty. And it seems that only aggressive AI spending is the reason why GDP continues to grow.

But is this fear overblown?

Is the S&P 500 overvalued?

There are lots of different metrics investors can look at to try and gauge where we stand in the current market cycle. But one of the most popular is looking at the price-to-earnings (P/E) ratio of market indices.

Looking at the S&P 500, the index currently has a P/E ratio of around 30.8. For reference, the long-term average for US stocks is closer to 19.4, which means that if the market were to suddenly return to the average, investors could be hit with a painful 37% downward correction.

But these figures are somewhat misleading. The S&P 500’s weighted based on market capitalisation. That means the largest companies like those in the Magnificent Seven have far more influence over the trajectory of the index versus smaller players. And with more capital being concentrated into these tech giants, the index as a whole has been lifted to lofty levels.

Yet on an equal-weighted basis, the S&P 500’s P/E ratio drops to just 22.5. That’s still above the historical average, but far less extreme.

This suggests if a correction does come along, most of the risk exposure is concentrated into just a small collection of the 500 companies in the index. And that creates some interesting opportunities for stock pickers.

Buying opportunities to consider

One business that’s caught my eye recently is Adobe (NASDAQ:ADBE). The creator of Photoshop and other creative tools has had a rough ride, slipping by over 37% in the last 12 months, while other tech stocks have continued to rally. And as a result, its shares are trading at a relatively undemanding P/E of 20.1.

With new AI tools cropping up, the level of competition for this business has increased significantly. And analysts are growing concerned that it could soon face pressure on its software subscription pricing plans.

However, Adobe has nonetheless been launching its own AI tools to counter this threat. And as a highly cash generative business, the firm’s gross and operating profit margins remain enormous at 89% and 36% respectively.

With so much excess earnings at hand and its share price falling, management’s been buying back its own stock. In fact, the number of shares outstanding has dropped by almost 10% since August 2024 – a pretty rare sight in the tech sector, where stock-based compensation dilutes shareholders rather than supports them.

That’s why, despite the seemingly overstretched valuation of the S&P 500 index as a whole, I think it might be wise to take a closer look at Adobe shares. And it’s not the only undervalued growth opportunity I’ve got my eye on right now.

The post Is it madness to invest in the S&P 500 now? appeared first on The Motley Fool UK.

Fortunately, billionaire investor Buffett has an important rule that can help investors get past a lot of the difficulties. And it’s one that everyone can apply.

Valuation

According to ‘Oracle of Omaha’, how much a stock’s worth comes down to the company’s future cash flows. Applying a discount rate to these gives the intrinsic value of its shares.

That however, isn’t always easy to calculate. Future cash flows are uncertain and the correct discount rate varies from one business to another depending on how risky they are.

Buffett though, has a rule for getting around these difficulties. It’s that investors should only buy a stock when they can see that it’s cheap without actually carrying out the calculation.

At the 1996 Berkshire Hathaway [Buffett’s investment vehicle] shareholder meeting, Charlie Munger said that he’d never seen the CEO actually do a discounted cash flow valuation. And Buffett agreed.

According to Buffett, if you can’t see that a share price is too low just by looking at it, the stock isn’t cheap enough to buy. Sticking to this provides a margin of safety in investments. 

That doesn’t however, mean investors don’t have to look carefully at the underlying business – they do. The point is that this is where the real work gets done, not in doing calculations.

An example

To see all this in action, let’s take a look at an example. After falling 39% in the last 12 months, Adobe (NASDAQ:ADBE) shares currently trade at a free cash flow multiple of around 14.

That’s certainly eye-catching. But there are some things about the underlying business that investors need to look closely at, rather than taking this number at face value.

Since the start of 2025, Adobe has issued around $1.45bn in shares to employees (incurring $380m in taxes in doing so). This offsets over 25% of the firm’s $7.5bn in free cash flow.

Given this, the headline cash flow multiple doesn’t quite reflect the business accurately. But while the number might be closer to 20, it’s probably fair to say it’s below this.

Is that an obvious bargain? The company’s facing some significant challenges, with artificial intelligence (AI) competitors offering similar services at a fraction of the cost to customers. 

Given this, investors need to think seriously about the firm’s growth prospects. Things almost certainly won’t be as straightforward as they have been. 

Value investing

Buffett’s first rule of investing is to avoid losing money. And a good strategy for doing this is to avoid making things unnecessarily complicated. That doesn’t mean not looking at potential investments closely. But it does involve being willing to move on from opportunities when they aren’t obviously attractive.

In the case of Adobe, that’s where I am – I don’t think the stock’s clearly overpriced, but isn’t obviously undervalued. So I’m focusing on more obvious opportunities right now.

The post Simplify your investing life with this one key tip from Warren Buffett appeared first on The Motley Fool UK.

Recent underperformance

One concern that has weighed on the stock is AI uncertainty amid rising competition. Investors worry that generative AI threatens incumbents (I prefer the phrase old-school) like Adobe. Of course, Adobe is investing heavily in integrating AI (more on that later), but some investors still feel it won’t be enough to retain the same level of market share.

Another factor has been valuation. Last year, the stock was close to all-time highs, with a very high price-to-earnings (P/E) ratio. We’ve seen the share price fall this year as a healthy reaction to it getting a more sensible valuation. High-growth tech stocks can experience sharp corrections in the short term, but this doesn’t mean that the long-term vision has been fundamentally derailed.

The picture right now

The share price correction now means the P/E ratio is 20.91. By comparison, the Nasdaq 100 average P/E ratio is 34.71. I believe the US stock offers good value compared to other large tech companies. It’s also a good indication that the sell-off could be coming to a close, as there will come a point when it’s simply too cheap for investors to ignore.

Unlike some other competitors, Adobe has a robust subscription model that generates predictable revenue. The latest results from September showed a record revenue haul, showing momentum here. Another benefit of this business model is its high free cash flow, which allows it to invest in new projects without relying on high debt levels to operate.

Coming back to AI, it’s true the company was a bit slow out of the blocks. However, it’s really catching up, embedding generative AI (Firefly-style assistants) across creative and experience products. It now refers to itself as “the leader in the AI creative applications category”. AI-influenced annual recurring revenue passed $5bn in the most recent quarter. If adoption ramps in the coming year, I think it’s a hard stock for anyone to ignore.

An attractive option

A concern looking forward is how well it can continue to monetise AI. There’s a big difference between building features and getting clients to pay for them. But recent results give me a strong impression that it can really boost revenue from this key source.

In contrast to some other AI-related companies, Adobe looks excellent value right now. I can’t say for certain if it’s the number one bargain buy of this year, but I think it’s a top contender. I’m seriously considering adding it to my portfolio, and I feel that other investors could think about doing the same.

The post Could Adobe stock be the bargain buy of 2025? appeared first on The Motley Fool UK.

However, some stocks haven’t performed so well, even though they’re well exposed to AI. In some instances this is because the market perceive AI to be a threat to their businesses.

So, today I wanted to look at two stocks that have pulled back over the past 12 months despite having important roles to play in the delivery of AI.

Salesforce

Salesforce (NYSE:CRM) is a leader in enterprise solutions. While this traditional enterprise solutions business has been slowing, there’s reason to get excited by its Agentforce operations.

Agentforce is a platform for creating and deploying specialised AI agents that automate tasks and workflows across a business. It uses generative AI to handle tasks, provide natural language responses, and make decisions grounded in a company’s specific data.

What’s more, Salesforce has a huge existing client-base, endless data, and some of the best software engineers around.

While some risks remain, especially the notion that an even bigger player could dominate with unmatched software — Microsoft ,for example — the stock’s valuation is undemanding.

It currently trades around 22 times forward earnings (P/E) and has a price-to-earnings-to-growth (PEG) ratio of 1.3. This is a 25% discount to the information technology sector average.

Analysts agree with this interpretation too with the average share price target being 28% above today’s price. That’s a decent sign of value. It’s definitely worth considering. It’s down 13% over the past 12 months.

Adobe

Adobe (NASDAQ:ADBE) shares are down 30% over the past 12 months. Clearly not a good return.

The concern is that programmes like OpenAI’s Sora 2 could undermine Adobe’s dominance in creative software by automating tasks that once required its flagship products.

Sora 2’s ability to generate photorealistic videos from text prompts, for instance, could threaten demand for Adobe’s tools like Premiere Pro and After Effects.

However, CEO Shantanu Narayen believes the market is mispricing the company. He recently told Bloomberg that investors have been overly focused on chipmakers and AI infrastructure providers, overlooking software firms that actually deliver AI-driven capabilities to end users. This is where Adobe, with a large existing client base, can excel.

Narayen argued that Adobe is “certainly undervalued right now,” highlighting the company’s profitability, growth prospects, and ongoing share buybacks as signs of confidence.

That confidence appears supported by the numbers. Adobe trades at a forward P/E of 16.3 — roughly 36% below the sector median and nearly 48% below its five-year average. Its forward PEG ratio of 1.14 is also a considerable (35%) discount to the sector.

Analysts consensus also suggests the stock is undervalued by 37%. That’s really noteworthy in the current, hot market.

While its momentum is poor and the market will need a catalyst to correct that, I believe Adobe is worth considering — or putting on the watchlist.

The post Down 13% and 30%, these US stocks could dominate AI delivery appeared first on The Motley Fool UK.

At the moment, it seems as though every company on the stock market wants to be associated with the rise of AI. Investors, however, need to be able to separate the winners from the losers.

Background: not all that glitters is AI gold

For a lot of investors, one of the first names that comes to mind when it comes to AI is Adobe (NASDAQ:ADBE). And there’s a good reason for this – the firm has made a lot of its AI credentials.

Despite this, the stock hasn’t just underperformed the S&P 500  over the last five years – it’s actually down 32%. How is this possible given the company’s AI connections?

An explanation is not far to seek. Revenue growth has slowed substantially since 2020 and the stock now trades at a much lower price-to-earnings (P/E) ratio as a result.

The rise of AI has been a problem for Adobe. Despite a loyal customer base, emerging competitors have limited its ability to raise prices, stunting its growth. And the stock has fallen as a result.

AI stock 1: Duolingo

That’s in the past, but shares in Duolingo (NASDAQ:DUOL) have Strong Buy ratings from a number of analysts right now. And I’m wary of a similar risk with the stock at the moment.

There are already reports that ChatGPT 5 can help users learn new languages by providing an interactive teaching platform. And that could be a big problem for Duolingo’s core product.

As with Adobe, I’m not necessarily expecting the company to start losing money. But at a (P/E) ratio of 132, a lot could go wrong if sales growth misses expectations.

Duolingo is starting to expand beyond language learning and I think this could be a good idea. Right now, though, I have a very different view to the analysts who are bullish on the stock.

AI stock 2: Amazon

By contrast, I have a much more positive view of Amazon (NASDAQ:AMZN). Analysts also rate the stock a Strong Buy and I think the company’s scale makes it much more difficult to disrupt.

I’m sure AI products will emerge that challenge the firm’s market position. But I expect it to be able to defend this by integrating them (or similar versions) into its own offerings.

Amazon is deploying huge amounts of cash into AI infrastructure at the moment. If demand for computing power falters, there’s a risk this could be a big mistake. 

Over the long term, though, I think what matters most is a strong competitive position. And I don’t see AI as threat to this with Amazon the way I do with Adobe or Duolingo. 

Moats and AI disruption

I’ve been wary of investing in AI stocks for some time, because it’s been hard to tell who the winners and losers are going to be. But I think the picture is just starting to become clearer.

As always, the key is finding companies with durable competitive advantages. And that doesn’t just mean businesses that are using AI to improve their existing well-established products.

The post 2 AI growth stocks analysts rate as Strong Buys for September appeared first on The Motley Fool UK.

UK dividend shares have – as a group – outperformed US tech stocks over the last 12 months. So whether it’s growth or passive income, investors shouldn’t think AI is the only game in town.

Investment returns

Over the last year, the iShares S&P 500 Information Technology Sector UCITS ETF, which tracks the S&P 500 tech sector, has returned 11.3%. That’s not bad, but there are a couple of issues. 

One is that – despite all the recent enthusiasm around AI – this is actually less than the S&P 500 as a whole. The entire index is up just over 13% since June 2024. 

Importantly, it’s also less than the iShares UK Dividend UCITS ETF – an ETF that holds a collection of UK dividend shares. This returned 13.69% during the last 12 months.

There doesn’t seem to be much between them, but the dividend ETF has also returned 5.3% in cash to shareholders. That takes the total return to almost 19%, which is a big difference.

Why the outperformance?

UK dividend shares outperforming US tech is all the more striking given the returns from the stock market overall. On both sides of the Atlantic, share prices have been reaching new highs.

Conventional wisdom, however, states that growth stocks are supposed to outperform when prices are going up. Dividend shares, on the other hand, provide resilience when things get tough.

One big reason the US tech sector has underperformed is that some individual constituents have put up some very poor results. Adobe (NASDAQ:ADBE), for example, is down almost 35%. 

It’s difficult for an index as a whole to outperform in a positive year when some of its constituents put up big negative numbers. Especially without the cash provided by dividends to offset this. 

AI risks and opportunities

The rise of new technology can be a threat as well as an opportunity. Adobe has dominated the creative software industry, but competing products driven by artificial intelligence are now starting to emerge.

The firm benefits from high switching costs, meaning it’s not easy for customers to move to an alternative product. But investors are becoming wary about its competitive position.

Uncertainty about Adobe’s pricing power and growth prospects is affecting the stock’s valuation. Over the last year, the price-to-earnings (P/E) ratio the stock trades at has gone from 51 to 24.

Analysts still generally have a positive view of the stock and I think it’s worth considering. But the last 12 months have been a good illustration of the fact that investing in tech stocks can be unusually risky, as well as rewarding.

Warren Buffett

According to Warren Buffett, the first rule of investing is to not lose money. Over the last year, the returns from US tech stocks have been a good illustration of the importance of this rule. 

Despite some outstanding gains from the likes of Palantir, the sector as a whole has struggled to overcome declines in its weakest performers. Adobe is one example, but it isn’t the only one.

By contrast, the steady returns from the UK’s blue-chip dividend shares have resulted in better performance. And that’s an important lesson for investors to take note of.

The post UK dividend shares are outperforming US tech stocks! appeared first on The Motley Fool UK.

Looking at performance

It might be surprising that the Adobe share price is down 6.46% year to date. This means that £2,000 would currently be worth £1,871. Some might feel that part of this drop could be due to the Trump tariff announcements in early April. Indeed, this spooked markets around the world. Yet Adobe shares were falling even before this April news. The US stock is now back above the start-of-April levels, showing investors have looked past this potential concern.

One factor weighing on the stock is the challenges in monetising AI investments. While Adobe has integrated its proprietary AI model, Firefly, into products like Photoshop and Illustrator, investors remain sceptical about the company’s ability to effectively monetise these features.

I recently read a report that criticised Adobe’s adopt-first, monetise-later strategy, expressing concerns over the lack of clear communication regarding the monetisation of AI tools.

Another point is that although there are positives surrounding using AI, competition is fierce. The AI-driven creative software market is becoming increasingly competitive. This means that even though Adobe has a good reputation, newer companies are quickly eating into its market share.

Trying to find value

Several of Adobe’s direct competitors aren’t publicly listed, making it hard to compare sector performance. Yet when looking at the broader sector, I can compare it to Oracle and Microsoft. Oracle is up 2% this year, with Microsoft up 11%.

I can also contrast performance with the Nasdaq index. It’s up 1% so far this year. I know that’s not much to shout about, but at least it’s positive instead of the unrealised loss that an investor would have from holding Adobe stock.

When I broaden the time frame, I can note that Adobe shares are down 7% in the last year. Some might think that this represents a potential value purchase. The price-to-earnings ratio is 27.35. Although I wouldn’t call this cheap, it’s not expensive compared to other tech companies.

Aside from the valuation, the stock could do well going forward for other reasons. For example, increased AI tool adoption could provide more revenue than is currently expected. Further, its traditional products are deeply embedded for existing users, meaning it has sticky income from these sources and good retention rates.

Ultimately, the share price movements in Adobe stock so far this year show the investor sentiment towards it. With the future a little cloudy on AI monetisation, I think investors can consider better opportunities elsewhere.

The post £2k invested in Adobe stock at the start of the year is now worth… appeared first on The Motley Fool UK.