Billionaire investors David Tepper of Appaloosa Management and Stanley Druckenmiller of Duquesne Capital were both adding shares of Adobe (NASDAQ: ADBE) to their portfolios in the second quarter.
Tepper initially started his position in the software company in Q1 and then added to it in the second quarter. It is now his ninth-largest position. Druckenmiller, meanwhile, initiated a new position in the stock during the quarter.
Let’s look at what may have attracted these two well-known investors to Adobe’s stock.
Dominant market positions
One of the first things that stands out about Adobe is that it is the dominant software player in several niches. First, it is the go-to software option for the vast majority of creative professionals, including graphic designers, photographers, and video editors, among others. Its flagship product is Photoshop, which is used to edit pixel-based photos and images.
However, it has a number of other popular products, such as Illustrator, which is used by designers to create vector images, and Lightroom, which is basically a digital darkroom used by photographers to progress images shot in RAW format. In total, it has more than 20 different creative software platforms.
Today, the company sells subscription services to its various software programs. It also offers a few bundled plans. It is estimated that the company has a nearly 80% market share in the computer graphics and photo editing field.
In addition to its market-leading creative software platforms, the company is also the leader in PDF solutions through its Adobe Document Cloud. Its main product is Acrobat, which lets users convert, edit, share, and sign PDFs.
The company also has a strong presence in web analytics and online marketing through its Adobe Experience Cloud offering. This business stems from its acquisition of Omniture back in 2009, but has expanded over the years to become a more complete web content management solution.
An emerging software AI play
Perhaps the most exciting reason to own Adobe is because the company has been at the forefront of embracing generative artificial intelligence (AI). The company released its Firefly AI model back in early 2023 and it can help with things such as generative fill, text to image, generative remove, and generative shape fill.
While semiconductor and cloud computing companies have ridden the early waves of AI, there is good reason to believe that software companies could be the next beneficiaries. After all, AI will help these companies create better products and experiences for their customers, although with AI evolving so quickly, many businesses have taken their time to develop their AI roadmaps and determine what software vendors they many use.
As the dominant player in the creative space, though, there is a lot of potential with what AI can do, and Adobe should ultimately be the company that delivers that experience. While its AI model has been around more than a year, Abobe is still in the early days of monetizing it.
Currently, Adobe gives a certain number of generative credits each month to its users based on their subscription plans. When they run out, they can purchase more. Right now this is helping bring in new users, but the company should be able to better monetize AI down the line.
While AI is providing a boost to its creative software programs, it’s had an even more meaningful impact with Adobe Document Cloud, which saw revenue soar 19% last quarter. The company’s new Acrobat AI Assistant, which can summarize documents, give insights, and help prepare presentations, so far has been resonating with customers after its introduction in April.
Overall, while AI is helping drive growth, the best could still be ahead.
Adobe Express
One of Adobe’s newest creative apps that could help power growth is Adobe Express. While most of Adobe’s apps are geared toward professionals and hobbyists, Adobe Express is a mobile app that has been designed for casual users. The app brings together Adobe’s creative software and generative AI to help users create more visually stunning social media posts, whether it be an Instagram photo or a TikTok video. The app can also be used for other tasks such as creating flyers and helping with a resume.
The app is much simpler to use than more complicated programs like Photoshop, and users can do such tasks as removing photo backgrounds, resizing images and videos, converting videos to GIFs, converting photos to PDFs, and merging videos. It also has a number of templates to choose from, as well as AI features such a generative fill and text to image.
The company currently offers a free version as well as a more advanced one for $9.99 a month, and a team version for $6.49 a user. Given the popularity of social media and the number of content creators out there, Express has a lot of growth potential in front of it.
Should investors buy the stock?
Adobe stock currently trades at a forward price-to-earnings (P/E) ratio of 27 times based on next year’s analyst estimates. However, its price/earnings-to-growth (PEG) ratio is under 0.8. Generally a PEG under 1 is considered very attractive. Given Adobe’s dominant market positions and solid growth opportunities, this looks like a solid entry point for long-term investors.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe. The Motley Fool has a disclosure policy.
Billionaires Were Busy Buying This AI Software Stock in Q2 was originally published by The Motley Fool
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