Adobe Stock Slides on Morgan Stanley Downgrade Over AI Fears
Analysts cut the software giant to 'Equal-Weight', citing risks to its core Creative Cloud business from generative AI competitors.
Shares of Adobe (ADBE) fell on Wednesday after Morgan Stanley issued a significant downgrade on the software company, citing growing concerns over the company's ability to monetize its artificial intelligence initiatives and fend off new competition.
The investment bank and slashed its price target to $450 from a previous $520. The move sparked a sell-off, with Adobe shares trading down nearly 3% to $351.66 in response to the report.
Morgan Stanley analyst Keith Weiss pointed to a deceleration in Adobe's Digital Media annual recurring revenue (ARR) as a primary concern. The report highlighted the potential for significant disruption to its flagship Creative Cloud business, which includes iconic software like Photoshop and Illustrator. Weiss estimates that AI displacement could impact as much as 50% of Creative Cloud's revenue, as users may opt for standalone generative AI tools that are rapidly emerging.
The downgrade reflects a broader challenge for established software leaders: how to effectively integrate and profit from generative AI without cannibalizing existing revenue streams. While Adobe has embedded its own AI model, Firefly, into its product suite, from these new features.
Despite the bearish outlook on its growth trajectory, the report did note that Adobe's stock is trading at what it considers a compelling valuation. Morgan Stanley pointed out that shares are priced at roughly a 50% discount compared to other large-cap software peers, suggesting a potential value play for investors willing to weather the current AI uncertainty. However, the immediate market reaction indicates that concerns over are at the forefront of investor sentiment.