It’s been a tough year for software stocks in 2026. Much of the focus has been on high-flying tech stocks such as Apple and Nvidia, which have hit record levels. The threat of artificial intelligence (AI), however, has been weighing significantly on many other types of businesses.
Adobe (NASDAQ:ADBE) is perhaps the classic example. AI chatbots can create professional-looking images with ease. In the past, consumers might have needed to use Adobe Photoshop to make such advanced visuals. As a result of the AI threat, investors have been dumping Adobe’s stock in droves.
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Year-to-date, it’s down 24%. But it’s been rallying in recent months, as the business has continued to perform well, perhaps putting at least some of those fears to rest. Can its rally continue, and can it finish the year above $300?
Image source: Getty Images.
Is Adobe’s stock undervalued?
Shares of Adobe have been falling sharply due to AI-related concerns. Even though it’s been rallying recently, it still trades at 15 times its trailing earnings, and that falls to a multiple of 10 when considering analyst expectations of future profits for the year ahead. Consider that by comparison, the average S&P 500 stock trades at 24 times trailing earnings and 21 times its future profits (based on estimates).
Adobe is clearly a discounted stock, but there’s also a valid rationale for this. If demand for its software diminishes over time, then its growth may evaporate. In its most recent quarter, which ended on May 29, the company’s revenue rose by 11% when excluding the effects of foreign exchange. That may seem decent, but that doesn’t mean the full impact of AI has been felt on the business just yet. Consumers, and especially professionals and businesses, may not simply cancel their subscriptions immediately and rely solely on AI chatbots for image generation. Transitions can take time, especially at the corporate level.
There is risk with Adobe, even at its current price, and the key question is whether there’s sufficient margin of safety priced into its valuation to make the stock worth buying today.
Why I think Adobe’s stock will finish the year above $300
Adobe may face greater AI-related headwinds, but it has also been incorporating AI into its products and services. Its sales aren’t going to just fall off a cliff. And even if revenue growth stalled, paying around 15 times earnings for the tech stock may still not be unreasonable.
