MW Adobe's stock drop highlights this fundamental disconnect over AI

By Emily Bary

Adobe's management team is bullish on the AI opportunity in creative services, but Wall Street is growing impatient on the revenue runway

Adobe Inc.'s latest earnings report has stoked further debate about how the company will fare in the artificial-intelligence era.

While Adobe $(ADBE)$ has powerful creative offerings that make use of AI, and on paper, the company seems poised to benefit from the hot technology. But Wall Street isn't clear how much money the tools end up making the company at a time when Adobe is putting adoption over monetization at the outset and up against various offerings from established rivals and beyond.

Shares of Adobe were down on the year heading into Wednesday's earnings, and they're off a further 12% in morning action Thursday to pace S&P 500 SPX laggards. "Investors are finding it hard to reconcile company's bullish AI commentary with soft results and growth guidance," Bernstein analyst Mark Moerdler.

See more: Adobe disappoints investors in this crucial metric, and shares fall

He cites various reasons for the "disconnect" between what Adobe's management is saying and what's been showing up in the numbers so far. Generative AI offerings "are tougher to create and monetize than originally thought," he wrote, while non-enterprise customers could take longer to come around relative to enterprise ones.

Additionally, Adobe seems focused on building a user base for its AI tools before it steps up its monetization, he said.

Overall, Moerdler stayed bullish, though with a nuanced take.

"We have said for a while that Adobe was a 'show me story'and has now become an 'explain to me and show me story,'" he wrote. "It could take multiple quarters depending on how visible it is to investors that AI monetization will happen."

Thinking big picture, though, Moerdler says "Adobe's business remains strong fundamentally, is in a good seat to monetize AI, and that there is a moat around the business." He rates the stock at outperform with a $587 target price, down from $644 before.

Melius Research analyst Ben Reitzes was less confident about Adobe's ability to retain its competitive edge.

"Our eyes tell us SoraAI is great (much better even), Canva and Figma are solid foes and every cloud and their brother has an AI image and video generator," he wrote. "These will be edited by prompts more and more - and won't need to go into Adobe as much if that happens. We just don't think the argument that 'AI creates more content that eventually goes into Adobe products' is going to necessarily be accurate - we just don't know."

He has a hold rating and $530 target price on the stock.

Derrick Wood of TD Cowen has questions about Adobe's plan to amass a large free user base before pushing monetization. "Net net, the long tail of users is the biggest rev driver for ADBE, and with the [medium-term] focus on proliferating free users before leaning into monetization, we don't see GenAI helping to bend the growth curve in the foreseeable future," he wrote.

Wood downgraded Adobe's stock to hold from buy after the latest earnings, while cutting his target price to $550 from $625. "A prioritization of AI adoption over monetization is leading to continued growth deceleration trends, w/ potential to fall into single digits," he wrote.

Read: 10 fast-growing software stocks to watch in 2025, including the runaway Palantir

-Emily Bary

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December 12, 2024 10:37 ET (15:37 GMT)

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