Adobe Stock Slips on Morgan Stanley Downgrade Over AI Concerns
Analysts lower price target to $450, citing uncertainty over the monetization of generative AI and rising competition.
Adobe's stock faced headwinds after Morgan Stanley signaling growing concerns over the company's ability to capitalize on the generative AI boom. The investment firm also slashed its price target for Adobe to $450 from $520, prompting a sell-off in early trading as investors reassessed the company's growth trajectory.
The downgrade stems from what Morgan Stanley analyst Keith Weiss described as a 'disconnect' between Adobe's rapid innovation in artificial intelligence and the actual growth in its crucial Digital Media Annual Recurring Revenue (ARR). While Adobe has aggressively integrated AI features into flagship products like Photoshop and Illustrator, the firm has not seen this translate into the accelerated revenue growth that was previously expected.
'The directionality of Digital Media ARR growth has diverged from the pace and quality of AI innovation embedded within the product portfolio,' Weiss noted in his report. The bank's prior 'Overweight' thesis was built on the expectation that Adobe's AI advancements would propel ARR growth into the mid-to-high teens, a scenario that now appears less certain.
Adding to the pressure is an Morgan Stanley highlighted increased competition from rivals like Canva and Figma, as well as incursions from tech behemoths such as Google and Meta Platforms, particularly in the realms of enterprise marketing and AI-driven content creation. This crowded field raises questions about Adobe's ability to maintain its pricing power and market share.
Despite the downgrade, Morgan Stanley acknowledged Adobe’s strong market position and the long-term opportunities presented by AI. However, the firm pointed to a lack of clear visibility on how these technological advancements will meaningfully boost revenue in the near term. According to the analyst note, Adobe remains in an 'investment mode' with its AI initiatives, which could delay margin expansion as the company navigates a more challenging and uncertain market.
Investors will now be closely watching Adobe's upcoming earnings reports for concrete evidence that its significant investments in generative AI can be effectively monetized, proving it can fend off rising competition and re-accelerate growth in its core creative software business.