Morgan Stanley downgrades Adobe on GenAI monetization concerns

Investing.com -- Morgan Stanley has cut its rating on Adobe to Equal-weight from Overweight, lowering its price target to $450 from $520, citing uncertainty over the company’s ability to prove that generative AI (GenAI) is a net growth driver for its business.

The analysts said that “decelerating Digital Media ARR has driven outsized concern on ADBE’s ability to prove GenAI net expansive to its total opportunity.”

While Morgan Stanley continues to “believe in both Adobe’s core value proposition and the expanded value capture opportunity Gen AI presents,” it noted that there are “potential pockets of risk” across the business.

The bank explained its earlier bullish thesis was based on Adobe’s capacity to innovate and monetize GenAI functionality, driving Digital Media annual recurring revenue (ARR) growth into the “~mid-to-high teens.”

However, Morgan Stanley said this trajectory has not materialised. Instead, “Digital Media ARR growth directionality diverge[d] from the pace and quality of innovation being embedded within the product portfolio.”

According to the analysts, “direct ‘Gen AI’ monetization has lagged initial investor (and our) expectations, explained by Adobe’s propensity to foster ubiquity and broad adoption of the technology ahead of monetization.”

In addition, the firm flagged “relative uncertainty in a sizable portion of the Adobe ARR base where we lack confidence in Gen AI advancements being a net positive.”

The note also highlighted competitive pressures from diffusion engines and large platforms such as Meta and Google.

Although Adobe shares trade at roughly “15x P/E demonstrating compelling value for a core Software franchise,” Morgan Stanley concluded that it has “limited confidence in timing that catalyst path” and sees “cleaner near-term narratives elsewhere in Software.”

You May Also Be Interested In