The Stock Drop in Adobe is a Clear Indication of This Fundamental Disconnect Over AI

Adobe Inc.’s latest earnings report has reignited discussions about its positioning in the age of artificial intelligence (AI). The company, known for its powerful creative tools incorporating AI, appears well-positioned to capitalize on this technology. However, Wall Street remains uncertain about the financial benefits these tools might bring, especially as Adobe prioritizes adoption over immediate monetization. This strategy places it in competition with established rivals and emerging alternatives.

‍

Heading into its earnings release, Adobe’s stock had already declined for the year. Following the report, shares dropped an additional 12% on Thursday morning, making it the worst performer in the S&P 500. Analysts have pointed to a disconnect between Adobe’s optimistic commentary on AI and the softer-than-expected results and growth projections.

‍

Mark Moerdler of Bernstein captured the sentiment, saying, “Investors are finding it hard to reconcile the company’s bullish AI commentary with soft results and growth guidance.” He attributes this gap to challenges in developing and monetizing generative AI tools. Additionally, non-enterprise customers appear slower to adopt these offerings compared to enterprise clients.

‍

Adobe’s focus on building a user base for its AI tools, rather than immediate monetization, has also raised questions. Moerdler remains optimistic about the company’s prospects but acknowledges that patience is required. “Adobe was a ‘show me’ story and has now become an ‘explain to me and show me’ story,” he said, noting that demonstrating clear AI-driven revenue growth may take multiple quarters.

‍

Despite some reservations, Moerdler maintains an outperform rating on Adobe’s stock, though he lowered his target price to $587 from $644. He emphasized the company’s strong fundamentals and competitive advantage in AI, suggesting that Adobe has the potential to monetize its tools effectively over time.

‍

Not all analysts share this confidence. Ben Reitzes of Melius Research expressed skepticism about Adobe’s ability to maintain its competitive edge amid growing competition. “SoraAI is great, Canva and Figma are solid foes, and every cloud and their brother has an AI image and video generator,” he wrote. Reitzes questioned whether Adobe’s products would remain essential if users increasingly edit content through AI-driven prompts rather than relying on Adobe’s tools.

‍

Reitzes holds a neutral stance on Adobe, assigning a hold rating with a $530 target price. He is unconvinced by the argument that AI-generated content will inevitably feed back into Adobe’s ecosystem.

‍

TD Cowen’s Derrick Wood also raised concerns about Adobe’s approach to AI monetization. The company’s strategy focuses on attracting a large base of free users before shifting toward revenue generation. However, Wood argues that this approach could hinder near-term growth.

‍

“Net net, the long tail of users is the biggest revenue driver for Adobe, and with the focus on proliferating free users before leaning into monetization, we don’t see generative AI bending the growth curve in the foreseeable future,” he wrote.

‍

Following Adobe’s earnings report, Wood downgraded the stock from buy to hold and reduced his target price to $550 from $625. He highlighted the risk of growth deceleration, potentially falling into single digits, due to the company’s prioritization of adoption over immediate revenue gains.

‍

Despite these challenges, some analysts believe Adobe is well-positioned in the AI landscape. The company’s extensive suite of creative tools and its strong market presence provide a solid foundation for long-term success. Moerdler pointed to the “moat” around Adobe’s business, suggesting that its unique offerings and established customer base give it a competitive advantage.

‍

However, as rivals like Canva and Figma continue to innovate and tech giants expand their AI capabilities, Adobe faces increasing pressure to prove its value proposition. The broader question remains whether the influx of AI-generated content will ultimately drive users toward Adobe’s products or diminish the need for them.

‍

Adobe’s latest earnings report has highlighted both its potential and the challenges it faces in the AI era. While the company’s focus on adoption over immediate monetization reflects a long-term strategy, it has raised concerns among investors and analysts about near-term growth prospects. As Adobe navigates this transitional period, its ability to balance innovation, competition, and revenue generation will be critical to maintaining its leadership in the creative software space.

‍