It may look like odd timing to back Adobe (ADBE:NASDAQ) just after lukewarm guidance, but we think this is a great opportunity.

The creative digital software firm called for fiscal 2024 earnings per share of $17.60 to $18 on $21.3 billion to $21.5 billion revenue, a little light compared with the consensus of $18 and $21.7 billion revenue respectively.

The shares plunged 7%, which seemed harsh to us for a bit of near-term uncertainty, especially given the proven quality of this business. We still strongly believe that Adobe stands out for several clear reasons: its consistently strong financial performance; a powerful balance sheet; exposure to structurally growing markets; and as a great play on AI, or artificial intelligence.

Adobe’s 2024 price to earnings multiple is 32.5, falling below 28 and 25 over the following couple of years as earnings per share close on $24 forecasts. This still might not look especially cheap to many investors, but it is historically low for a business consistently growing way above market averages and delivering 34% operating margins and return on equity. Return on capital employed is 30.9%.

At the end of 2023, Adobe could be sitting on more than $3 billion of net cash. This business is a giant in the creative software space through tools like PDFs, Photoshop, Illustrator, InDesign and Premiere Pro. It is reckoned to own a rough 50% market share. AI is now becoming Adobe’s growth secret sauce, and it has already integrated Firefly into the toolkit, designed to help creatives be more creative.

Ben Rogoff, manager of the Polar Capital Global Technology (B42W4J8) fund and Polar Capital Technology Trust (PCT) has recently admitted bolstering his Adobe positions because its scope to monetise AI is one of the best around.

Adobe’s $20 billion acquisition of rival Figma has been canned after facing regulatory hell. While something of a blow it at least provides a measure of clarity and we believe the company retains its long-run appeal for investors regardless.

To date, 2023 has seen the stock rally more than 70%, tilting the volatility needle, which may not suit every investor. That said, with interest rates looking increasingly like falling in 2024, the market backcloth should be healthier for growth stocks next year.

Analyst consensus has a $700 stock valuation for the next year, and we wouldn’t be at all surprised to see the stock top that in 2024.

Disclaimer: The author of the article (Steven Frazer) owns a personal stake in Polar Capital Technology Trust.

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