This Underrated AI Stock is Down 40%. It’s a Buy According to Wall Street Pro

It still isn’t too late to unearth value in the AI scene, even after the red-hot, tech-led S&P 500 recovery off those ominous April depths. While all things AI are heating up again, not every so-called AI play has been closing in on all-time highs. In this piece, we’ll check in on what could be one of the most underrated large-cap AI tech stocks in the market over the past year. Though the name has encountered a number of setbacks and hurdles, I continue to view it as a name primed to deliver on its many AI promises.

For creative software developer Adobe (NASDAQ:ADBE), it’s been tough to tell if it’s a powerful AI disruptor or a sitting duck bound to be disrupted as new creative AI models and image generators threaten to break the company’s economic moat and cause creative suite subscribers to start cancelling en masse.

Adobe’s moat may have narrowed, but it’s still moving fast on AI

Only time will tell how the competition will fare as Adobe doubles down on its own AI efforts. Despite the growing number of potential industry rivals, programs such as Photoshop and Illustrator still seem able to hold their own, especially as new AI features are rolled in. Undoubtedly, Adobe’s platforms have been made markedly better with Firefly (Adobe’s generative AI models) thrown into the mix. If anything, Firefly may have made its software easier to use for a broader creative audience.

It’s not just creative software that’s drastically enhanced via AI, either. Its broad ecosystem (think Acrobat AI and all the sort) is made that much better with a bit of an AI touch. But the big question for Adobe is whether the AI-first companies moving in on the scene will be able to offer something that’s better, cheaper, and easier to use. With firms like OpenAI and Alphabet (NASDAQ:GOOGL), Google Gemini continuing to advance their creative AI capabilities, I do understand why investors and analysts would have pause on ADBE stock, especially as the firm switches some of its users to pricier subscription tiers while jacking up prices on its highest tier.

Personally, I’m not sure if Adobe has the same magnitude of pricing power it used to. In any case, as long as Adobe stays on the cutting edge of creative AI, it’ll be able to maintain its pricing power. Analysts over at Morgan Stanley (NYSE:MS) think that pricing changes could be a boon for growth, forecasting a 150-200 bps boost for this year. With a $510 per-share price target (implies 23% upside from Monday’s closing price) and upbeat hopes for the “high-end of the portfolio,” I do buy the case for ADBE stock being too cheap here while it’s hovering at $416 and change per share.

What about valuation?

Even after Morgan Stanley’s encouraging note, I think there’s room for upgrades on the name, as Adobe looks to prove itself by passing some rather low bars set ahead of its upcoming quarters.

At the time of this writing, ADBE stock trades at 27.5 times trailing price-to-earnings (P/E), which is very reasonable for a firm that’s dominated the creative software scene for so long. With price change catalysts on the way and potentially underrated innovations rolling across the suite, perhaps it’s time to start viewing Adobe as an underappreciated AI play rather than a firm that’s at risk of falling behind.

As AI gains a greater sense of agency, it’ll be very interesting to see how the creative suite stands to evolve over time. For now, it seems like too many investors are quick to dismiss Firefly’s ability to keep up in this AI race. In any case, all eyes will be on earnings, as the stock, which is still down close to 40%, attempts to sustain some positive momentum after a tumultuous past few years.

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