05. Adobe Inc. (NASDAQ:ADBE)
Price Reaction after the Downgrade: -5.49(-1.18%)
On June 10, Melius Research made a notable adjustment to its evaluation of Adobe Inc. (NASDAQ:ADBE), downgrading the company from a previous recommendation to a “Hold” rating. This decision was influenced by the challenges Adobe Inc. (NASDAQ:ADBE) faces within the competitive landscape of the artificial intelligence (AI) sector. The downgrade reflects growing concerns regarding Adobe Inc.’s ability to effectively compete and innovate in the rapidly evolving AI landscape, which is becoming increasingly critical across various industries.
While Adobe Inc. has made strides in integrating AI into its product suite, introducing features like the Adobe Acrobat AI Assistant and other generative AI tools aimed at improving document comprehension and productivity, Melius Research highlights the formidable competitive pressures and the imperative for continual innovation in AI. Despite Adobe Inc. (NASDAQ:ADBE) established strength in digital media and marketing software, Melius Research advises investors to proceed with caution, citing uncertainties surrounding Adobe Inc.’s trajectory in AI and the necessity for vigilant monitoring.
This shift in rating occurs as Adobe Inc. persists in introducing new AI-driven features, striving to maintain its foothold in the market. However, Melius Research’s assessment underscores the pivotal role that Adobe Inc. (NASDAQ:ADBE) strategies and execution in the AI domain will play in shaping its future performance. The downgrade by Melius Research elicited a market reaction, with Adobe Inc.’s stock price experiencing a decline of 1.18% on June 10, closing at $459.94. This adjustment underscores the significance of Adobe Inc.’s endeavors in AI and the heightened scrutiny surrounding its competitiveness and innovation efforts in this critical area.
Baron Durable Advantage Fund stated the following regarding Adobe Inc. (NASDAQ:ADBE) in its first quarter 2024 investor letter:
“Adobe Inc. (NASDAQ:ADBE) is a leading developer of marketing, publishing, and graphics software. Shares declined 15.6% during the quarter after the company reported annual recurring revenue that surpassed its initial guidance but fell short of buy-side expectations by $20 million to $25 million. This shortfall raised investor concerns that Adobe may need a faster ramp in the second half of the fiscal year to hit its annual guidance. We have conviction that Adobe can meet or exceed its guidance thanks to: 1) expansion of price increases to additional regions as well as heightened renewals in the second half of the year, and easier year-over-year comparisons due to the dissipation of headwinds from 2022’s price increases; 2) incremental monetization from GenAI’s new offerings, particularly within enterprise-focused solutions like GenStudio and Firefly, which are gaining traction; and 3) introducing new solutions, including upcoming Document Intelligence add-on capabilities. While investors remain focused on the short term, we believe Adobe is a leading creative and marketing franchise with an exciting innovation cycle ahead, poised to optimize its extensive user base, expand its opportunity, and benefit from GenAI trends. We believe the stock’s decline is overdone as more than 100% of the decline was driven by multiple contraction, even though the company’s 2024 EPS estimates increased slightly (by 0.3% during the quarter) and the company’s intrinsic value has not materially changed.”
While we acknowledge the potential of ADBE as an AI play, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than ADBE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
