This Software Stock Could Soar 74% Over the Next Year, According to an Analyst -- and Patient Investors Could Get Even Better Returns

After a rough start to the year, software stocks are staging a comeback. The iShares Expanded Tech-Software Sector ETF had turned positive on the year by the end of May before falling again this month. But not every software company has participated in that strong run since software stocks bottomed in April.

That means there are still many opportunities in the sector for patient investors. One company poised to see its stock price rebound and continue climbing is Adobe (NASDAQ: ADBE). The stock is down 44% so far this year, but J.P. Morgan analysts think it could climb 74% over the next year.

Here's what's weighing on the stock, and why it looks so undervalued as a result.

Image source: Getty Images.

Big changes are afoot

Adobe is undergoing some significant changes all at once. That creates significant uncertainty about the business's future, especially as the entire industry grapples with the impacts of generative AI. It's no wonder the stock has sold off this year.

The executive team is getting a big shake-up. CEO Shantanu Narayen announced his retirement earlier this year, saying he will stay on while the board finds his replacement. Then, alongside the company's second-quarter results, CFO Dan Durn announced his departure, effective June 15.

While the C-suite gets a makeover, the company has also shifted strategies. "AI-first applications that will serve broader audiences need to provide free, intuitive onboarding that drives usage and monetization through paywalls. Big picture, the immediate opportunity for Adobe is to accelerate new user acquisition and lifetime value through a freemium offering," Narayen said during Adobe's second-quarter earnings call.

The shift led J.P. Morgan's analyst team to lower its price target on the stock from $420 to $340. "These actions reflect a deliberate strategy to capture AI-driven growth opportunities, creating short-term [annual recurring revenue] headwinds, but positioning the company for long-term upside," the analysts wrote. In other words, the stock could continue climbing if the transition toward more freemium users pays off in an acceleration in annual recurring revenue down the road.

Indeed, the long-term upside of the strategy could be significant if management can execute. However, with management in transition, significant execution risk remains.

But at today's price, the downside investors currently face is far less than the upside potential. Shares currently trade for about 3 times sales and 8 times earnings expectations. At that price, revenue could fall well below management's expectations for double-digit annual recurring revenue growth for the foreseeable future. Considering its products remain industry standards, it seems highly unlikely that it'll see such a significant deceleration in revenue growth, making it an incredible opportunity for patient investors.

JPMorgan Chase is an advertising partner of Motley Fool Money. Adam Levy has positions in Adobe. The Motley Fool has positions in and recommends Adobe and JPMorgan Chase. 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.