Palantir's (NYSE: PLTR) stock has been soaring like there's no tomorrow for the past year and a half. Once famous mainly as a software provider focused on government clients, the data analytics and artificial intelligence (AI) specialist has made rapid inroads in the commercial segment. Palantir's cutting-edge software solutions help clients sift through huge amounts of data and derive actionable insights. The company's large-language-model-powered Artificial Intelligence Platform (AIP) is also helping attract new customers and upselling to existing customers.
Palantir's shares have increased about 110% in 2024 and remain a Wall Street favorite. However, the stock is trading at 33.6 times trailing-12-month sales, significantly higher than its three-year average price-to-sales (P/S) ratio of 20.7. That may be too high for many investors.
I believe that Adobe(NASDAQ: ADBE) has the potential to grow similarly to Palantir and that it may prove attractive in the long run. Here's why.
Adobe's share slump seems unjustified
Adobe, best known for its Acrobat and Photoshop software, came out with impressive third-quarter fiscal 2024 results (ended Aug. 30), with revenue and earnings surpassing estimates. Despite this, the stock has fallen about 11% since the results came out on concern about weaker-than-expected projections for the fourth quarter. Investors also seem concerned about the monetization of its AI technologies, fearing that the company may be falling behind in the generative AI race.
However, this investor reaction seems unjustified, considering that the lower-than-expected fourth-quarter revenue forecast can be mainly attributed to the timing of deal closure. A few deals that would have historically closed in the fourth quarter instead closed in the third quarter. Additionally, while Cyber Monday sales are typically included in the fourth quarter, this time, they will be included in the first quarter of fiscal 2025.
Robust operational and financial performance
Adobe delivered an impressive third-quarter financial performance. Revenue was $5.41 billion, up 11% year over year, and non-GAAP (adjusted) earnings per share were $4.65, up 14%. The company also reported remaining performance obligations of $18.14 billion at the end of the third quarter, implying strong prospects for future revenue growth.
Adobe has been focused on integrating several AI capabilities in its document cloud products. These include AI Assistant to improve productivity and user experience with digital documents and generative-AI-based text-to-image generation capabilities (powered by the Firefly model) in PDF documents. The company has also partnered with third-party ecosystems including Alphabet's Google Chrome and Microsoft's Edge to provide its products as browser extensions. These initiatives have translated into significant improvements in monthly active users, overall usage, and free-to-paid conversions for its document cloud products such as Adobe Reader and Acrobat.
Adobe has also integrated new Firefly-powered generative AI features in cloud offerings such as Photoshop, Illustrator, Lightroom, and Premiere Pro, which is helping drive customer retention and the number of customers switching to higher-value plans.
This implies that Adobe's AI capabilities are helping strengthen and drive growth for its core business.
New revenue streams
Adobe's AI tools can also open new revenue streams. The company's AI-first content creation application, Adobe Express, helps individuals, students, teams, and enterprises with quick design tasks. Adobe Express saw a 96% quarter-over-quarter jump in the number of monthly active mobile users and an 86% year-over-year rise in the number of creations made with the application in the third quarter. Strong demand, coupled with freemium-tiered pricing, can help bring in significant revenue in the long run.
Adobe makes use of generative credits to track the computational use of its generative AI tools powered by the Firefly model. The company seems to be considering limiting use of generative credits in its applications. As demand for the company's generative AI tools soars, customers may be charged for generative credits over the cap level.
Adobe is also gearing up to launch a Firefly-powered text-to-video model by the end of 2024. Leveraging the company's image and video capabilities, Firefly video could pose a strong challenge to OpenAI's Sora model. The company is considering launching premium AI subscription plans, to give customers access to advanced text-to-video and image-to-video capabilities in its core creative products.
Valuation is reasonable
Although it may take some time for Adobe to monetize its AI tools, the company seems to be moving in the right direction. Plus, the company has a fundamentally strong core business.
Despite this, Adobe is trading at 11.2 times trailing-12-month sales, lower than its historical five-year average P/S ratio of 13.3. That trailing-12-month figure is about a third the level of Palantir's P/S ratio.
Considering Adobe's robust business model, multiple AI-powered tailwinds, and a reasonable valuation, the company may see healthy growth in the coming months.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Manali Pradhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, Alphabet, Microsoft, and Palantir Technologies. The Motley Fool has a disclosure policy.
