Is Adobe Inc. (ADBE) the Best Augmented Reality Stock to Buy Now?

We recently compiled a list of the 10 Best Augmented Reality Stocks To Buy Now. In this article, we are going to take a look at where Adobe Inc. (NASDAQ:ADBE) stands against the other augmented reality stocks.

Augmented reality (AR) is a technology that enhances our perception of the real world by overlaying digital elements through devices, adding to your existing environment. There are various ways to describe AR, from spatial computing to holographic projection, but its practical applications define its true value. A notable example of an AR device is the HoloLens, a holographic computer that enables users to interact with digital content within the real world, leading to its growing adoption across various industries such as education, manufacturing, and healthcare.

AR/VR Startups

Despite its applications and prospective growth, the AR space seems to have lost favor with venture capitalists, with investments declining due to disappointing adoption rates for the gear and leading metaverse platforms. Even the launch of the Vision Pro headset earlier this year, promoted as a "spatial computing" device, didn't significantly shift the mood. Reports suggest that demand for the $3,500 device is cooling, prompting the maker to lower its shipment forecast.

Similarly, the investment climate in the startup sector remains cold, with only about $464 million invested this year in seed through growth-stage funding for AR, VR, and metaverse-related companies. This sets 2024 on course to reach the lowest funding total in years. Most startups that raised large financings during the peak in 2021 haven't secured new rounds since. However, despite the slowdown, some notable deals have still occurred, with the largest AR-related round this year going to Rokid, a maker of augmented reality glasses, which raised $70 million in January. Another notable investment was in Beijing-based Xreal, a mixed-reality glasses maker that  positions itself as a more affordable alternative to the Quest and Vision Pro, which raised $60 million in January at a $1 billion valuation.

Most notably, Google recently partnered with augmented reality startup Magic Leap in a strategic technology deal, hinting that the tech giant may be preparing to re-enter the AR and VR market, a space it has mostly left to rivals. Over a decade ago, the search engine giant was a trailblazer in AR. This enthusiasm peaked during a 2012 demo where skydivers used the glasses to live stream a jump onto a building in San Francisco. However, the product faced significant consumer pushback due to its awkward design and privacy concerns.

Augmented Reality Market & Outlook

The global augmented reality market, valued at $32.1 billion in 2022, is projected to grow from $42.85 billion in 2023 to $432.35 billion by 2031, with a compound annual growth rate (CAGR) of 33.5% over the forecast period, according to industry data from SkyQuest.

A significant portion of the market is mobile AR, leveraging the widespread ownership of smartphones, tablets, and other mobile devices. As of this year, it's projected that there will be 1.7 billion devices capable of supporting mobile AR. Notably, a key advantage mobile AR enjoys is the massive existing smartphone user base. Unlike the steep challenges AR glasses face, mobile AR benefits from "zero-cost" hardware, making its path to adoption relatively smoother. Growth is expected across both enterprise and consumer segments, including digital AR experiences. A well-known example is the 2016 video game Pokémon GO, where players explore their surroundings to find virtual characters on their phones. Additionally, collaborations between key market players and 5G providers to address latency issues are expected to fuel market growth.

Our Methodology

In this article, we reviewed online rankings and ETFs to determine 20 companies operating in the AR space. We then selected the 10 stocks that were the most popular among elite hedge funds. We sourced the hedge fund data from Insider Monkey's database of 912 hedge funds, as of Q2 2024. Our focus was on companies that produce AR-related hardware, software, or technologies used in developing augmented reality products. However, we also included companies that offer services essential to the AR industry, like semiconductor chips.

At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

A team of engineers and scientists collaborating at a workstation surrounded by their applications and solutions.

Adobe Inc. (NASDAQ:ADBE)

Number of Hedge Fund Holders: 107

Adobe Inc. (NASDAQ:ADBE)'s approach to augmented reality is seamlessly integrated into its Creative Cloud platform, utilizing tools like Adobe Aero. Aero enables users to create interactive AR experiences without needing advanced coding skills, making it accessible and user-friendly. This approach taps into the vast community of creative professionals already familiar with Adobe's software interfaces.

Adobe Inc. (NASDAQ:ADBE)’s revenue increased by 10% year-over-year in the quarter ending May 31. For the fiscal third quarter, the company expects adjusted earnings per share between $4.50 and $4.55, with revenue ranging from $5.33 billion to $5.38 billion. Analysts had predicted $4.48 in adjusted earnings per share and $5.4 billion in revenue. In addition, the company’s Digital Media segment, which includes Creative Cloud subscriptions, reported net-new annualized recurring revenue of $487 million, surpassing the consensus estimate of $437.4 million.

Analysts at Deutsche Bank were particularly optimistic about Adobe Inc. (NASDAQ:ADBE), adding the stock to their Fresh Money list, which highlights top investment ideas. They believe that Adobe's Creative Cloud division will continue to grow, especially with the incorporation of generative AI products. The firm raised its price target for Adobe Inc. (NASDAQ:ADBE) to $650. Additionally, Mizuho analyst Gregg Moskowitz noted that the potential for AI monetization at Adobe Inc. (NASDAQ: ADBE) is being "underappreciated" by the market.

Alger Focus Equity Fund stated the following regarding Adobe Inc. (NASDAQ:ADBE) in its Q1 2024 investor letter:

“Adobe Inc. (NASDAQ:ADBE) is a diversified software company that provides document and creative software to a wide audience, including creative professionals and enterprises. Its flagship products, such as Photoshop, Acrobat, and Creative Suite, set industry standards like PDF and Flash, supporting a broad range of Adobe applications. As such, we believe Adobe is a primary beneficiary of the digitization (i.e., converting analog information into digital format) spending theme. Recently, the company announced a generative Al (Gen Al) tool called Firefly which is a family of creative GenAl models which will be incorporated into Adobe’s product suite, which can be utilized by consumers and enterprises to potentially save time and effort by automating tasks like image and text generation. We believe Adobe has the potential to leverage Al by integrating software programs into its existing products and enhancing developer Application Programming Interfaces (APIs) to facilitate Al-driven workflows. While the company delivered strong fiscal first quarter operating results, shares detracted from performance after management lowered their fiscal second quarter guidance with Al related growth acceleration being pushed out into the second half of 2024 due to difficult year-over-year pricing comparison. particularly within their creative vertical segment.”

Overall ADBE ranks 6th on our list of the best augmented reality stocks to buy. While we acknowledge the potential of ADBE as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ADBE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

 

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Disclosure: None. This article is originally published at Insider Monkey.