Adobe (ADBE) Stock Downgraded at Morgan Stanley on Slower AI Monetization

Adobe Inc. (NASDAQ:ADBE) is one of the  AI Stocks in the Spotlight This Week. On September 24, Morgan Stanley analyst Keith Weiss downgraded the stock from Overweight to Equalweight driven by slower AI monetization. It holds a price target of $450.00 (from $520.00) on the stock.

Analysts at Morgan Stanley stated that they had previously been bullish on the stock expecting GenAI to accelerate growth in its Digital Media Business. However, Adobe’s revenue growth has failed to keep up the pace despite rolling out new AI features quickly.

Direct AI monetization has been slower than hoped as the company focused on adoption first. There is also considerable uncertainty regarding how much GenAI advancements will benefit Adobe’s business.

Overall, the firm still believes in Adobe’s core strengths and AI potential, but sees limited near-term catalysts amid competitive pressure from Meta and Google which could become material.

“Our prior OW thesis on Adobe was predicated on the ability for the company to successfully innovate on, deliver, and eventually monetize Generative AI functionality across the customer base, leading to an inflection in Digital Media ARR growth to the ~mid-to-high teens. Since that upgrade, we have seen the Digital Media ARR growth directionality diverge from the pace and quality of innovation being embedded within the product portfolio, leading us to the following conclusions: 1) 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; and 2) there is relative uncertainty in a sizable portion of the Adobe ARR base where we lack confidence in Gen AI advancements being a net positive. Related to the latter, as we recently discussed (See Software: Checking the Software Pulse – “I’m Not Dead Yet”), the recipe for turning around sentiment on the legacy SaaS applications group necessitates vendors demonstrating a convergence of stabilization in the core business plus the ability for Gen AI capabilities to enhance and expand their addressable market opportunity. As such, decelerating Digital Media ARR growth despite 1) an accelerated pace of innovation, 2) ramping usage and adoption metrics against that innovation, and 3) the benefit from price action has left investors questioning Adobe’s ability to demonstrate this equation. To be clear, we continue to believe in both Adobe’s core value proposition and the expanded value capture opportunity Gen AI presents for complex, multi-channel marketers. However, given a lack of visibility into buckets of the base where competitive pressures (from both external Diffusion Engines and the likes of Meta/Google) could prove more material, we struggle to paint a clear catalyst path to DM ARR growth acceleration.”

Adobe Inc. (NASDAQ:ADBE) is a software company that provides digital marketing and media solutions.

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