Generative AI didn’t exactly tiptoe into Adobe’s  (ADBE) backyard; it basically kicked down the gate. 

For a little color, ChatGPT alone has surged to an eye-catching 700 million weekly users, essentially resetting customer expectations.

On top of that, there’s online design tool Canva, which weaponized its “Magic” features, amassing a whopping 220 million monthly users in the process and winning enterprise share.

Similarly, Figma turned its canvas into an AI playground with agent integrations and code-aware workflows.

Naturally, generative AI had Adobe scrambling, as it pushed Firefly into Creative Cloud, launching Acrobat AI Assistant, while building GenStudio for marketers under pressure to scale content. 

The adoption headlines looked impressive, with 99% of the Fortune 100 using AI in an Adobe app, and roughly 90% of the top 50 accounts with an AI-first product. Nevertheless, Wall Street wants proof, not pilots.

Adobe shares have tanked 20.6% YTD and more than 11% over six months, reflecting skepticism that AI features alone can push its growth engine to the next level.

That’s the powerful backdrop for a major Morgan Stanley downgrade, which calls out the gap as it questions how the Street values Adobe’s AI optionality.

Adobe stock slips after Morgan Stanley slashes its rating, citing fresh doubts over the company’s ability to turn generative AI into real revenue.

Morgan Stanley cuts Adobe stock rating on AI doubts

Image source: SOPA Images/Getty Images Morgan Stanley just pulled back the reins on Adobe, cutting its price target to equal-weight from overweight, over its ability to cash in on the generative AI boom.

Top analyst Keith Weiss flagged a growing gap between Adobe’s AI promises and the revenue numbers that are showing up in its Digital Media annual recurring revenue (ARR).

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Weiss writes in his note: Since that upgrade, we have seen the Digital Media ARR growth directionality diverge from the pace and quality of innovation being embedded within the product portfolio.

More importantly, the bank slashed its price target to $450 from $520, cautioning that direct AI monetization is not moving the needle yet.

Key points from Morgan Stanley’s call:

  • AI revenue is still lagging: Monetization is expected to be much slower, as ARR isn’t accelerating.
  • Competitive heat rising: Canva, Figma, and Big Tech rivals like Google and Meta are closing in.
  • Price reset: Target cut nearly 15%, signaling diminished upside.

Moreover, Adobe stock fell 2.35% to $353.27 on Sept. 24, then edged slightly lower in after-hours trading, reflecting Wall Street’s unease.

Adobe touts AI promise, but ARR tells another story

Adobe continues touting its AI momentum, but it hasn’t been showing up where investors want it most in Digital Media ARR.

In Q2 FY2025, Adobe exited with $18.09 billion in Digital Media ARR, jumping 12.1% year-over-year. In Q3, its ARR skyrocketed to $18.59 billion, but growth slowed down to 11.7% year-over-year, which is hardly the AI-driven “inflection” the Street has been seeking.

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More Tech Stocks: Nonetheless, its management keeps pointing to big AI tallies. CEO Shantanu Narayen said in September, 

AI-influenced ARR has now surpassed $5 billion, and we have already surpassed our full-year AI-first ending ARR target.

In echoing that enthusiasm, CFO Dan Durn said that ARR from new AI-first products has already topped $250 million, a quarter ahead of plan. 

Rewind to June, and the narrative was similar: “AI-first… is tracking ahead of the $250 million ending ARR target,” Adobe told investors while reporting its Q2 results. However, we saw only a modest uptick in the aggregate ARR base, along with slower year-over-year growth in Q3.

Although Adobe’s AI adoption is real, the monetization cadence is lagging the marketing sizzle. Also, Upsell ARPU and seat expansion are happening. Yet ARR growth hasn’t re-accelerated, which raises some uncomfortable questions for the Adobe bulls.

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