By Mackenzie Tatananni

Morgan Stanley says it is still waiting for Adobe's push into generative artificial intelligence to bear fruit. That's one reason the firm's analysts downgraded the stock Wednesday, sending shares lower.

Best known as the maker of Photoshop and other design software, Adobe has rebranded as an AI-centered company in recent years. CEO Shantanu Narayen said in September's third-quarter earnings release that Adobe was "the leader in the AI creative applications category."

But some analysts argue that Adobe's investment in AI isn't panning out. Morgan Stanley joined the chorus of criticism on Wednesday as the firm lowered its rating on Adobe to Equal-weight from Overweight and slashed its price target to $450 from $520.

Adobe stock declined 3.4% to $349.42 on Wednesday, on pace to extend its losing streak for a fourth consecutive day. The stock, which is down 21% this year, has lost 4.9% since the close on Sept. 18.

Morgan Stanley analysts led by Keith Weiss pointed to a deceleration in digital media annual recurring revenue, or revenue attributed to Adobe's subscription-based services.

This trend "has driven outsized concern on Adobe's ability to prove GenAI net expansive to its total opportunity," they wrote.

Adobe has taken steps to stay neck-and-neck with other technology companies that invest heavily in AI, rolling out a suite of text-to-image and text-to-video tools in 2023 and progressively incorporating generative AI into its flagship photo-editing software.

Before the downgrade, Morgan Stanley believed these efforts could propel digital media ARR growth into the mid-to-high teens in percentage terms. This hasn't panned out; rather, growth in the category "has seen a decelerating trend" since the first quarter of 2024, Weiss wrote.

Adobe didn't immediately respond to a request for comment.

Digital media ARR growth slowed to 11.7% in the most recent August quarter from a pace of 12.6% in the February quarter. Morgan Stanley projects that it will stall even further, decelerating to a rate of 11.5% by the end of November.

Adobe's direct generative AI monetization "has lagged initial investor (and our) expectations," Weiss wrote. Moreover, "there is relative uncertainty in a sizable portion of the Adobe ARR base where we lack confidence in Gen AI advancements being a net positive."

The firm has a favorable view of Adobe's broader competitive positioning with creative professionals and customers in the marketing space. However, "we acknowledge potential pockets of risk," Weiss wrote.

Despite these concerns, the consensus view on Wall Street is that Adobe is worth the investment. Of 43 analysts polled by FactSet, 30 rate the stock at Buy or the equivalent, while 11 rate it at Hold and two at Sell.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com

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September 24, 2025 11:39 ET (15:39 GMT)

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