The AI Frenzy’s False Pause

The recent chatter about pausing advanced AI development has left investors scrambling to understand its implications on their portfolios. A pause in AI development is, however, wishful thinking at best. When stakes are high, innovation continues unabated.

Adobe (ADBE) is often cited as a beneficiary of this perceived “pause,” with its stock having fallen nearly 15% from its highs. Some argue it’s a buying opportunity, but what exactly does this mean for the future of AI and its impact on businesses like Adobe?

The current state of AI development bears some resemblance to the Cold War era, when nations secretly worked on nuclear technology despite official treaties to the contrary. Today, we’re witnessing a new kind of tech war between the US and China, with both sides vying for dominance in AI research and development.

Adobe’s latest earnings report was touted as a “beat and raise” quarter, but closer inspection reveals some concerns. The company’s remaining performance obligations grew 8% year-over-year, down from double-digit growth just a few quarters ago. Adobe’s annualized recurring revenue growth is slowing, attributed in part to the company’s pivot towards a freemium model.

While AI disrupts traditional business models, it also presents new opportunities for companies like Adobe to innovate and adapt. Adobe’s ARR of $27.5 billion is more than 40 times larger than its AI business’ ARR of $650 million – a tiny fraction, but one growing rapidly nonetheless.

Adobe’s recent leadership changes may be contributing to the company’s stock price correction. The departure of CEO Shantanu Narayen and the selection of Anil Chakravarthy as his successor has raised eyebrows among investors. Some see this as an opportunity for Adobe to shake up its leadership and adapt to changing market conditions, while others are more skeptical.

Despite these concerns, I believe Adobe’s stock is still a solid buy at current prices. With a price-to-earnings ratio of around 11x and a P/E-to-growth multiple below 1x, the valuations are reasonable. The recent correction has brought Adobe’s valuation down to more sustainable levels, making it an attractive opportunity for investors.

Adobe is well-positioned to navigate these changes and emerge stronger on the other side. A company as innovative and agile as Adobe will continue to thrive regardless of AI development’s trajectory. While a pause in AI development may be a nice dream, I wouldn’t count on it happening anytime soon.

The question now is what’s next for Adobe? Will Chakravarthy’s leadership bring about new initiatives that drive growth and innovation? Or will the company continue to struggle with its shift towards a freemium model? Only time will tell.