For years, Adobe Inc (NASDAQ:ADBE) has been hailed as the “system of record” for creative professionals.
But a sharp 3.4% slide in its stock on Wednesday showed how fragile that narrative has become.
Morgan Stanley cut its rating on the software maker to 'equal-weight' from 'overweight', trimming its price target to $450 from $520.
The bank argued that Adobe faces an “optically challenging” path to reigniting growth in its core Digital Media business, even as it pours money into generative AI tools like Firefly.
The concern, it said, is not whether Adobe is innovating, but whether those innovations translate into faster growth.
Digital Media annual recurring revenue has slowed since early 2024 despite rapid product rollouts, wider adoption, and price increases. Customers appear to be settling into lower pricing tiers, which may boost retention but drags on near-term revenue.
The analysts also flagged risks from AI upstarts and rivals like Meta and Google. While about 20% of Creative Cloud revenue comes from casual users and small businesses, Morgan Stanley warned that AI displacement could creep into the much larger professional user base.
Tools such as Canva and open-source image generators could chip away at subscriptions for single-app users, particularly Photoshop.
A third pressure point is spending. Adobe has ramped up research and development since 2021 to defend its market leadership in AI. Operating margins have held steady in the mid-40s, but Morgan Stanley now expects sustained investment to delay any expansion.
Despite the downgrade, the bank still described Adobe as a core franchise trading at about 15 times forward earnings — a steep discount to other large software companies.
“We continue to believe in Adobe’s competitive moat,” the analysts wrote, but they see “cleaner near-term stories elsewhere in software” such as Salesforce and ServiceNow.
The tension is clear: Adobe remains central to marketing and creative workflows, but the AI era is bringing new uncertainty. Investors are being asked to wait longer for growth to reaccelerate, even as competitive risks mount.
In afternoon trading, the shares were down $12.31 at $349.47.