Morgan Stanley downgraded Adobe's stock. Are AI capabilities overrated?
Unlike Morgan Stanley, most analysts on Wall Street will continue to believe in Adobe
Investment bank Morgan Stanley, one of the largest on Wall Street, has joined Adobe's critics. The slowdown in the company's subscription revenue growth has led the bank to question whether efforts to incorporate artificial intelligence tools into Photoshop and other products can expand Adobe's market potential.
Details
Morgan Stanley on September 24 downgraded Adobe from "above market" (Overweight) to "at market level" (Equal Weight) and reduced the target price of shares from $520 to $450 because of the risks associated with the company's bet on artificial intelligence. The investment bank said it has yet to see a tangible return on investment from the market leader's investment in AI digital content creation programs, Barron's wrote.
Morgan Stanley analysts led by Keith Weiss pointed to a slowdown in annual recurring revenue (annual recurring revenue, ARR) growth in the digital media segment, i.e. revenue from Adobe's subscription services. According to them, this trend has raised strong doubts about Adobe's ability to prove that AI is expanding its market opportunities.
Prior to the downgrade, Morgan Stanley believed that Adobe's efforts to incorporate AI tools into Photoshop and other products could accelerate ARR growth to 15-19% (mid-to-high teens). However, that hasn't happened: as of Q1 2024, growth in this category "shows a slowing trend," Weiss noted. Adobe's direct monetization of AI "did not meet investors' (and our) initial expectations," the analyst admitted.
Despite this, Morgan Stanley is positive about Adobe's position among creative audiences and marketing professionals. However, "we recognize that there are potential risk areas," Weiss added.
What other analysts are saying
On September 10, a day before Adobe's strong quarterly report, JPMorgan Chase analyst Mark Murphy reiterated a "Buy" recommendation (Buy) for Adobe shares with a target price of $540 per security. Murphy reiterated his confidence in the company's positive outlook, citing stable revenue numbers. He noted that on this indicator, the company regularly meets and exceeds forecasts.
Adobe is one of the best stocks to buy with "huge" upside potential, Insider Monkey claims. In mid-September, the financial platform ranked Adobe eighth on its list of the most promising stocks trading on the Nasdaq exchange.
What Wall Street thinks of the stock
Despite Morgan Stanley's caution, the Wall Street consensus on Adobe remains favorable. Of the 43 analysts tracked by FactSet, 30 recommend buying its shares (ratings Buy, Overweight and their analogs), 11 - to hold and only two - to sell. The average target price of $457.22 per paper, calculated by the service, implies a 29% year-over-year growth in quotations.
This article was AI-translated and verified by a human editor
