Alphabet Inc. (NASDAQ: GOOGL ) and Adobe Inc. (NASDAQ: ADBE ) are different firms whose businesses overlap. While the former is one of the largest technology companies in the world, the latter is primarily a productivity software provider that enables customers to work with documents, images and other mediums. However, the age of AI has made it difficult for Adobe Inc. (NASDAQ:ADBE) due to worries that the technology can enable its customers to develop their own solutions. In a tweet, Cramer discussed the impact Alphabet Inc. (NASDAQ:GOOGL)'s new Pics AI image editing tool could have on Adobe Inc. (NASDAQ:ADBE):
"New google product could be tough for Adobe....again..."
The difference in their scale means that the narrative for Alphabet Inc. (NASDAQ:GOOGL) and Adobe Inc. (NASDAQ:ADBE) is also different. While image editing and productivity software aren't as crucial for the former, for the latter, they are its bread and butter. For Alphabet Inc. (NASDAQ:GOOGL), the massive nature of its capital spending to generate returns is at the heart of the debate. In its second quarter, the firm posted negative $5.9 billion in free cash flow, which marked the first such occurrence since it went public in 2004.
Yet, Alphabet Inc. (NASDAQ:GOOGL) is also delivering results as its Google Cloud business posted $24.8 billion in revenue to mark an 82% annual growth, along with broadcasting a $514 billion cloud backlog. Additionally, the firm's Services business, which covers Search and YouTube, posted 15% annual growth to indicate that AI was not cannibalizing its Search business. Yet, at the same time, should the Cloud business revenue turn out to be cyclical or if depreciation on its assets increases, the firm could experience tailwinds.
Looking at Adobe Inc. (NASDAQ:ADBE), all eyes are now on its upcoming fiscal third quarter earnings report due on September 10th. The debate is focused on whether the firm will be able to durably monetize AI. On this front, the second quarter saw the firm provide a crucial $500 million AI-first annual recurring revenue (ARR) figure, driven by its GenStudio enterprise platform's ARR jumping by 25% and Firefly adoption growing. Yet, as is the case with other software companies, Adobe Inc. (NASDAQ:ADBE) admitted during the release that Freemium Firefly plans were also impacting near-term ARR growth. The drag also led the firm to cut its full year ARR guide by $500 million. Not to mention, the legacy Creative Cloud platform saw growth decelerate at 13% annually and Adobe Inc. (NASDAQ:ADBE) also deferred platform optimization.
Shifting towards valuation, Adobe Inc. (NASDAQ:ADBE) is trading at a forward P/E ratio of 10.45, which is less than half of GOOGL's 22.32. The AI-related concerns also appear to influence the short interest, with 5% of the float being sold short compared to 1% for GOOGL As for the hedge funds, 275 held a stake in GOOGL while 81 held a stake in Adobe Inc. (NASDAQ:ADBE) in Q2.