MW Will AI help or hurt Adobe's stock? The uncertainty now has these analysts feeling cautious.

By Britney Nguyen

Morgan Stanley analysts noted that Adobe's AI risk 'may be higher than feared' - or at least that it could take longer than expected for the company to realize true AI benefits

Adobe shares were down about 3% on Wednesday.

The great debate over Adobe Inc.'s ability to contend in the artificial-intelligence era rages on.

Adobe $(ADBE)$ surprised investors earlier this month when it proved its creative-software business was holding its own as AI companies offer their own tools for image generation and other tasks. But some on Wall Street are still worried about Adobe's positioning, and on Wednesday a team of Morgan Stanley analysts joined the chorus of those expressing some caution.

Specifically, the analysts said it might take time for the company to see generative AI as a net positive to its business.

The uncertainty has weighed on Adobe's stock, which had fallen about 19% through Tuesday's close as the S&P 500 SPX gained about 13%. Now the stock is off another 2.7% in Wednesday action following a Morgan Stanley downgrade.

The analysts downgraded Adobe's stock to equal weight from overweight based on their concerns, while lowering their price target to $450 from $520. The new target is still above the roughly $352 where shares were changing hands in Wednesday afternoon action.

Morgan Stanley previously thought the company would be able "to successfully innovate on, deliver and eventually monetize generative AI functionality across the customer base." That could have helped the growth rate for Adobe's digital-media annual recurring revenue, the analysts noted, while saying that stabilizing growth is key for software companies that wish to turn around negative investor sentiment.

But since then, the analysts said, the direction of digital-media ARR growth has actually diverged "from the pace and quality of innovation being embedded within the product portfolio."

With the deceleration in digital-media ARR growth, the analysts said they have concluded that direct monetization of generative AI "has lagged initial investor (and our) expectations." They tied that to a new pricing strategy Adobe management shared during its third-quarter earnings call. As a result, customers are settling into "the pricing band most appropriate to their needs," the analysts noted, and that's potentially problematic for average selling prices.

See more: Adobe's earnings beat shows investors that AI is finally paying off, and the stock rises

"While acknowledging this settling dynamic should result in a higher retention rate of those customers and a higher lifetime value of the customer over the long term, we believe it may also present incremental near-term headwinds to growth, obfuscating the path to top-line reacceleration," the Morgan Stanley analysts said.

The analysts now see a challenge for Adobe to speed up its digital media ARR growth again, but they "see a clearer path to revenue reacceleration/a more favorable overall growth profile" at fellow software companies Salesforce Inc. (CRM) and ServiceNow Inc. (NOW).

The Morgan Stanley team also said they "lack confidence in gen AI advancements being a net positive" for Adobe due to uncertainty in part of its ARR base. Not only do software players have to demonstrate stabilization in the core business, the analysts said, but the companies also have to show that generative AI capabilities are enhancing and expanding the addressable market opportunity.

Despite demonstrating an acceleration in innovation, ramping use and adoption against that innovation and benefits from pricing action, Adobe's decelerating digital-media ARR growth has investors concerned about the company's "ability to demonstrate this equation," the analysts said.

The risk posed by AI to Adobe's cloud growth "may be higher than feared," the analysts said, despite their confidence in the company's broader competitive position with creative professionals and marketers.

Limited visibility "into the size and magnitude of AI-deplacement headwinds with consumers, simple marketers and business users lowers our conviction in the net impact to Creative Cloud and Digital Media growth," the analysts said.

The largest risk they see is in individual single apps, where customers use just one of Adobe's products. Those instances could be more easily replaced by other generative-AI tools. While this is also a risk with larger teams that use one product, "stickier enterprise contracts may result in more durable revenue streams," the analysts noted.

Meanwhile, Adobe's operating margins have been mostly stable despite an increase in its research and development spending on AI that started in fiscal 2021, the analysts said, also noting management's aim to keep operating margins in the mid-40% range throughout its investment cycle. However, the analysts said Adobe's "sustained 'investment mode'" might make its path to operating-margin expansion longer.

Morgan Stanley said it still sees Adobe's risk-reward balance skewing in a positive direction. However, with the effort the company has to make to improve investor sentiment on its shares and the analysts' "limited confidence in timing that catalyst path," they said there are "cleaner near-term narratives elsewhere" in the software space.

-Britney Nguyen

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September 24, 2025 14:32 ET (18:32 GMT)

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