Morgan Stanley: Adobe’s Future at Risk Due to AI

Morgan Stanley has downgraded Adobe’s stock rating, cutting its price target for the software giant amidst a perceived inability to stand out amidst the rise of generative AI.

According to a report from The Street, top Morgan Stanley analyst Keith Weiss noted a growing gap between Adobe’s AI development (and promises) and reported revenue in its Digital Media division.

“Since that upgrade, we have seen the Digital Media annual recurring revenue (ARR) growth directionality diverge from the pace and quality of innovation being embedded within the product portfolio,” Weiss writes in his report.

The full report notes that Adobe’s revenue which it can tie directly to its AI-based efforts has been lagging, and monetization is going slowly. Compounding issues are growing from competitors like Canva, Google, and Meta, who all have introduced AI-based features that they can more directly tie to revenue growth. As a result, Morgan Stanley lowered their price target for Adobe from $520 to $450. It doesn’t look like it’s close to even hitting that lower mark, however, as the stock has been steadily falling in the past couple of weeks. It hit $353 per share on September 24 and sits at $344 on October 1.

Adobe’s current weakened situation is likely a product of its own making. For the last year, Adobe has been shouting loudly about its AI development and the power of its in-house generative AI platform, Firefly. However, after updates and iterations, Firefly remains significantly behind competitors in terms of usefulness. While its select subject and remove tools have become a lot better over the last couple of months, for most of the year, its generative tools have been downright ghastly, resulting in Eldritch nightmares that don’t solve the problems they should. Its AI-based generative video tool is still far from being usable.

The AI situation at Adobe has been so behind that the company recently opened up its platform to use other Generative AI tools — most recently Nano Banana — diminishing the value of its “responsible” AI to the degree that Adobe seems less concerned with it now than ever, especially as pressure mounts to make good on its AI-based revenue promises. In June, Adobe finally started tracking generative AI use through its apps via credits, which will very likely be an indicator that Adobe can use to tie AI to revenue. But if those numbers aren’t high and showing an upward trend, investors still won’t be happy.

That’s tricky for the software company, as the main users of its Digital Media division are still artists, many of whom are less than happy with the proliferation of generative AI that has been trained on human work, effectively stealing knowledge so it can be sold back to them.

Adobe is not wholly beloved by its customers either, who regularly clamor for someone else to step in and give Adobe competition. Its recent foray into social media network Bluesky is the best example of how Adobe’s customers feel as the company was hit with so much backlash after joining that it was effectively forced off the platform.

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