Better AI Stocks: Adobe and Snowflake

Adobe (NASDAQ resonance code: ADBE)respond in singingSnowflake (NYSE: SNOW)Both cloud software companies are upgrading their ecosystems with new AI capabilities.

Adobe, known for its cloud-based digital media software, has been expanding the capabilities of Firefly, a generative artificial intelligence tool that creates images and digital models from text-based prompts. It can also be used to accelerate and automate tasks in other cloud services.

Snowflake aggregates, cleans, and stores data from various computing platforms in its data warehouse so that it can be accessed by other applications. It has been introducing new Cortex generative artificial intelligence tools to process this data more efficiently.

However, neither stock has impressed the bulls this year, validating them. As of this writing, Adobe shares are down 171 TP3T year-to-date, while Snowflake shares are down 231 TP3T, so let's see if these two out-of-favor tech stocks are still worth buying.

Adobe 麪臨臨競争和監琯挑戰

Over the past decade, Adobe has transformed its Noodle application into a cloud-based service. This bold move has kept its customers on a sticky, recurring subscription basis and maintained its dominant position in the digital media software market. This has also enabled it to launch more cloud-based sales, marketing and analytics services.

From FY 2013 to FY 2023 (ending December 1, 2023), Adobe's Compound Annual Growth Rate (CAGR) for Revenue is 17% and Compound Annual Growth Rate (CAGR) for Earnings per Share (EPS) is 28%. However, from FY 2023 to FY 2026, analysts expect Adobe's Compound Annual Growth Rate for Revenue to be only 11% and Compound Annual Growth Rate (CAGR) for EPS to be 17%. However, from FY2023 to FY2026, analysts expect Adobe's revenue to grow at a compound annual rate of only 11% and its earnings per share at a compound annual rate of 17%.

Adobe is still growing, but faces tough competition and challenges in monitoring Gwen. In the user interface (UI) and user interface (UX) software design market, Figma is competing fiercely with Adobe XD; Canva is challenging Photoshop with its Web-based image editing tool; and evenMicrosoftAdobe had tried to buy Figma for $ 20 billion, but in December last year, Adobe had to abandon the deal after antitrust watchdogs blocked it, and the曏 paid a $ 1 billion termination fee to a smaller competitor.

Adobe also recently disclosed that the U.S. Federal Trade Commission (FTC) has opened an investigation into its subscription cancellation policies and fees, and Adobe has acknowledged that it may incur "significant monetary costs or penalties" to resolve the investigation. In a potential settlement, Adobe's subscriptions may be subject to strict new restrictions.

Adobe is trying to counteract these unfavorable factors by raising prices, cutting costs, and buying back a lot of stock. But at 28 times forward earnings, the stock isn't cheap, and insiders have been net sellers over the past 12 months.

Snowflake still faces serious short-term challenges.

Snowflake's Data Warehouse breaks down the silos between large enterprises by pulling their real-time data into a centralized location. It's not tied to a larger cloud infrastructure platform, charging customers a usage fee based only on the storage and computing power they need, rather than locking them into a sticky subscription.

Snowflake initially dazzled the bulls with its growth rate after its public debut in 2020. From FY2021 to FY2024 (ending January 31, 2024), revenue from the products that make up the bulk of its revenue grew at a CAGR of 69%.

The company is not profitable under U.S. General Accounting Standards (GAAP), but realized a non-GAAP profit in fiscal 2022. This figure (excluding stock-based compensation) rose 25-fold in fiscal year 2023 and almost quadrupled in fiscal year 2024.

But Snowflake's growth is cooling off. From FY2024 to FY2026, analysts expect its revenues to grow at a compound annualized rate of just 23%, as Snowflake remains grossly unprofitable on a GAAP basis. Snowflake attributes much of this slowdown to more severe macro headwinds in software spending, suggesting that the company may not be able to achieve its long-term goal of growing annualized product revenues to $10 billion by FY2029, or 30% compound annualized for six years starting in FY2024.

Chief Executive Officer Frank Slootman laid out this ambitious goal in his 2022 Investor Day speech, and his recent resignation raises more questions about the company's future. Moreover, Snowflake's shares aren't cheap, trading at more than 200 times forward earnings, or 15 times this year's sales, and its insiders have sold six times as many shares as they bought in the past 12 months.

Better Choice Adobe

I've said recently that it's smarter to sell Adobe than to buy it, as competitive hypochondria and a challenge from Koon could send its stock price plummeting. But I'm even less enthusiastic about Snowflake, which is too expensive relative to its growth.

I'm not going to rush out and buy these two beaten-down stocks right now. But if Adobe's stock price gets a little cheaper and it solves its most pressing problems, I'll consider buying again. As for Snowflake, I'll need to see if it can stabilize its product revenue growth and actually shrink its GAAP losses before I'll consider it a long-term investment.

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Leo Sun does not own any of the stocks mentioned above.The Motley Fool holds recommendations on Adobe, Microsoft and Snowflake.The Motley Fool recommends the following options: long Microsoft January 2026 $395 calls and short Microsoft January 2026 $405 calls.The Motley Fool has a disclosure policy.

Better AI Stocks: Adobe vs. Snowflake was originally published by The Motley Fool.