AI has really landed a heavy shot on some of the software names, especially the SaaS (Software as a Service) companies that have been quite slow to brace for the rise of the artificial intelligence (AI) age. Undoubtedly, with agents, robotics, and all sorts of transformative and revolutionary disruptive tech up ahead, standing pat and resisting change could be the formula for a tremendous fall from grace. Of course, the software firms weighed down by AI disruption fears have taken the technology seriously and have pivoted accordingly.
Yet, investors remain quite skeptical because the net impact from the rise of AI may still be negative. Undoubtedly, with AI coders getting better by the day, the value of software might be headed for further deterioration. At the same time, there are software companies that are in a position to embrace the wave of change. Even if it means cannibalizing other parts of the business, pivoting and adapting, I think, is key to staying relevant in the age of fast-moving AI-driven disruptive innovation.
Now, not all software companies will be able to stay afloat as the AI tide rises. But there are some firms that have what it takes to reinvent themselves as AI changes software for good.
In this piece, we’ll check in on a software name that has been under considerable pressure for a number of years now. And while AI may be more of a risk or cause for concern than an opportunity for certain companies, I do see the following names as undervalued, with AI strategies that look poised to work as the AI winds of disruption move in.
Adobe’s massive fall from grace at the hands of AI fears
Adobe (NASDAQ:ADBE | ADBE Price Prediction) stock cratered to depths not seen since the trough of 2022. With shares down close to 55% from all-time highs, the shares now go for 18.2 times trailing price-to-earnings (P/E), a price point that would have been unheard of just four years ago. In any case, creative works seem to be one of the biggest strong points of generative AI, and it’s getting shockingly better every single year.
For a firm behind such applications as Photoshop, Illustrator, and Premiere, and more, it’s not difficult to see why so many investors have rushed out of the stock, even though Adobe’s Firefly AI product is so impressive. While Adobe acted fast to inject AI across its suite, it feels like it doesn’t matter how much better Adobe’s AI capabilities get; the AI-native rivals are coming, and they seem to have what it takes to get past Adobe’s moat.
With Oppenheimer and Jefferies recently downgrading the stock in recent weeks, it’s getting tougher to justify holding, especially as shares continue tumbling endlessly lower. Add Apple‘s (NASDAQ:AAPL) new Creator Studio suite into the equation, which is full of machine learning (ML) innovations, and it seems like there’s no telling when the pain in Adobe shares will end. With so many downgrades and so much fear already priced in, though, I think it makes sense to punch a ticket with the P/E multiple now in the teens.
Big downgrades and negative momentum make it harder to be bullish
As a part of the Oppenheimer downgrade, analyst Brian Schwartz and his team cited a “challenging operating environment during the AI technology transition, leading to uninspiring and decelerating top-line growth” among other notable issues. While Oppenheimer did note that the stock has become “cheap,” the headwinds certainly seem to outweigh the tailwinds. And while Adobe does appear to be giving AI its all, the stock stands out more as a “show-me” story than anything else.
Even if Adobe’s best days are over amid AI’s disruptive impact on creative software and the effect on the “prosumer,” the stock is trading at historically low multiples. Perhaps Adobe’s Firefly video model that offers “surgical control” might help Adobe tilt the tables back in its favor. Undoubtedly, maybe Adobe can go above and beyond prompts to offer a level of precision that allows Adobe to regain the lead in its corner of software.
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