The Stock of Adobe Fell to Its Lowest Level in 18 Months as the Ai Story Will Take Time to Develop

Adobe Inc. stands at the precipice of potential gains amidst the surge in artificial intelligence, promising a wider scope for its creative tools' applications. However, current revelations from the software giant have left investors disheartened, as Adobe's timeline for capitalizing on these new use cases appears to lag behind expectations.

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This disappointment is evident as Adobe's shares plummeted by 12.8% during morning trading on Friday, marking the most substantial single-day percentage decline since September 15, 2022, when the decline reached 16.8%.

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Jefferies analyst Brent Thill conveyed in a client note post-earnings that the monetization of AI may not unfold as swiftly as investors desire. Thill underscored Adobe's continuous efforts towards fostering AI adoption and usage, highlighting the likelihood of monetization emerging more prominently in the latter part of 2024 and extending into 2025. Nonetheless, despite this setback, Thill reiterated a buy rating with a target price of $700 in his Friday report.

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Kirk Materne from Evercore ISI commented on Adobe's outlook, suggesting that the full-year projections now appear less inclined to offer significant upside potential concerning Firefly, a generative-AI creative tool. Moreover, Materne pointed out that the benefits Adobe accrues from generative AI are somewhat obscured by the pronounced impact of last year's price hikes, which exceeded expectations.

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However, Materne remains optimistic, outlining a viable path to achieving $1.9 billion in net new digital-media annual recurring revenue once pricing headwinds alleviate in the latter half of the year. He suggests that investors with a longer-term perspective may perceive Friday's downturn as an intriguing buying opportunity, maintaining an outperform rating, albeit with a lowered price target of $650 from $700 on Friday.

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In contrast, HSBC analyst Stephen Bersey adopted a more cautious stance, highlighting the potential negative implications of AI for Adobe. Bersey emphasized that while Adobe historically maintained a robust competitive advantage, the advent of AI has gradually eroded many of these barriers, thereby amplifying competitive pressures over time. He maintains a hold rating on the stock with a target price of $511.

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UBS's Karl Keirstead weighed in on Adobe's strategy, noting that the company is not presently emphasizing near-term Firefly revenues through strict volume limits but rather prioritizing usage. Keirstead finds this approach acceptable, drawing a parallel with Salesforce Inc., which is pursuing a similar strategy. However, Keirstead suggests that Adobe's shares might carry a more pronounced AI premium compared to its counterparts. Despite this observation, he maintains a neutral rating on the stock while adjusting the price target downward to $540 from $600.

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