Adobe's stock gets a downgrade as its AI narrative is nuanced

By Emily Bary

The software company reports earnings on Thursday

Adobe Systems Inc. shares picked up a downgrade Monday morning - and the analyst acknowledged he was late with this call.

Shares of Adobe (ADBE) are off 22% so far this year, and Melius analyst Ben Reitzes thinks they could tread water "for a while." He cut his rating to hold from buy in his latest note, which comes just days before Adobe's earnings report scheduled for Thursday.

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While Adobe has compelling artificial-intelligence tools, the picture around that is nuanced, according to Reitzes.

"We have seen certain companies we cover like IBM use the amazing Firefly tool to get more productive but the end result was a major reduction of seats in its marketing department," he wrote.

Furthermore, he has questions about how meaningful a revenue driver AI can be for Adobe when so many companies are making generative-AI tools available.

"Our main concern right now is whether Adobe can really charge extra for its Firefly tools - or if AI is just table stakes - and has to be included given competition," Reitzes wrote. He pointed to "a rash of new entrants in terms of image and video generators from Runway to Getty to Google and OpenAI."

Reitzes said that consensus expectations assume Adobe will see a major lift in net new annualized recurring revenue during the second half of the year, owing to easier comparisons, the benefits of product introductions and financial boosts from AI.

But Reitzes and his team "don't see upside to consensus," he wrote, with Adobe's forward multiple of about 24 times earnings looking "about right for the challenges it faces," in his view.

Adobe's stock was off 1.5% in premarket trading Monday.

Reitzes's Adobe downgrade comes during a period of general pressure on software stocks, highlighted in part by Salesforce Inc.'s (CRM) recent downbeat guidance. "The great run of software-as-a-service since the 2010s may still be in the early innings of unwinding," he wrote.

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-Emily Bary

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06-10-24 0832ET

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