Is Adobe the Ultimate Buy-on-the-Dip Stock?

While many companies are making a fortune from the artificial intelligence (AI) build-out, others are being actively disrupted. Adobe (NASDAQ: ADBE) is one of those companies, as its digital creation software is at risk of being replaced by AI-generated images.

However, there's a counterargument: A human touch to images is preferred in some situations, which means Adobe's software remains relevant. Adobe is also incorporating AI tools into its software to make it easier to use and more flexible.

However, Adobe's stock has been a terrible performer lately because the market assumes it will be a victim of AI rather than a beneficiary. So, is it worth buying on the dip? Or are there better alternatives?

Image source: Getty Images.

Adobe's growth has barely budged

Adobe operates on a subscription platform, which makes its revenue fairly steady. Despite everyone being worried about AI disruption, Adobe has continued growing its revenue at a slow but steady pace.

ADBE Revenue (Quarterly YOY Growth) data by YCharts.

There wasn't much that changed between 2022's growth rate (prior to AI adoption) and what's being seen now. However, Adobe's stock has sold off and is down around 60% from its highest level, seen in late 2021. So, with the stock selling off heavily yet continuing to grow, the stock should be valued at a very cheap level, and that's exactly the case.

ADBE P/E Ratio (Forward) data by YCharts. P/E = price-to-earnings.

Adobe trades at just 11 times forward earnings, which clearly indicates the market is skeptical of the stock. At a price like that, Adobe's stock may seem irresistible. But is that the case? I don't think so.

The reality is that Adobe is unlikely to develop a product that enables it to deliver strong growth in the 20% to 30% range. The market will likely remain skeptical of Adobe's ability to regain market share as AI becomes more popular, so its valuation is unlikely to rebound.

Even if it does rise to market-average levels of about 20 times forward earnings, that's a single doubling, followed by market-average growth moving forward.

That's the best-case scenario, and there are many AI stocks expected to double or triple their revenue over the next few years that already trade at somewhat reasonable prices. While I don't think the outlook for Adobe is as bad as the market thinks, I also don't think it's a stock that people need to invest in. Being a hero in the stock market isn't necessary, and investors don't need to mess around with Adobe's stock when there are so many solid AI stocks available.

Keithen Drury has positions in Adobe. The Motley Fool has positions in and recommends Adobe. The Motley Fool recommends the following options: long January 2028 $330 calls on Adobe and short January 2028 $340 calls on Adobe. The Motley Fool has a disclosure policy.