We came across a bullish thesis on Adobe Inc. (NASDAQ:ADBE) on ValueInvestorsClub by 08ird. In this article, we will summarize the bulls’ thesis on ADBE. The company’s shares were trading at $437.28 when this thesis was published, vs. the closing price of $435.08 on Mar 10.

A designer carefully crafting a web page on their laptop while referring to several design plans spread across a desk.

ADBE operates as a technology company worldwide through its three segments: Digital Media, Digital Experience and Publishing & Advertising. The Digital Media segment accounts for 74% of the revenue and 79% of gross profit while Digital Experience contributes 25% of revenue and 19% of gross profit.

ADBE has 650 million users with 37 million of them having access to Creative Cloud and are extremely active. The common narrative has been that Gen AI tools like Midjourney would provide a significant threat to ADBE’s business but the company has been successful in integrating AI into its core products. Adobe Firefly, its flagship AI initiative, has been embedded into Photoshop, Illustrator, Adobe Express and Gen Studio allowing users to generate high-quality images and videos using natural language prompts. AI can sustain a decade-long growth in the low to mid-teens and expand margins as well.

Firefly also enables ADBE to harvest more subscriptions and facilitate upselling. For example, Creative Cloud (CC) subscribers would have access to generative credits in their subscription, allowing them to use AI with their products. As user adoption increases, they will buy more credits to use the features. Firefly would also prompt Adobe Express users to shift to CC once they become confident of the design capabilities. Even marketers who form a part of the Digital Experience customer base would benefit by seamlessly integrating Gen AI features in their workflows.

ADBE trades at an EV/Revenue multiple of ~9x. This is a significant discount considering the FCF + 1-year revenue growth at ~50%. In the long term, ADBE should trade at 16x its revenue estimates. A higher valuation is justified due to its strategic position in leveraging Gen AI which will enable it to grow revenues at double digits. Based on a higher relative multiple, ADBE is trading at a discount of almost 50%.

While we acknowledge the potential of ADBE as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than ADBE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.