Late to the Party

On Monday morning, Adobe Systems Inc. faced a downgrade from Melius analyst Ben Reitzes, who admitted his call came later than ideal.

Adobe shares have dropped 22% year-to-date, and Reitzes predicts they may stagnate for some time. In his latest note, just ahead of Adobe's earnings report on Thursday, he downgraded the stock from buy to hold.

"We've observed companies like IBM leveraging the impressive Firefly tool to boost productivity, but it ultimately led to significant cuts in their marketing teams," Reitzes commented.

Moreover, he expressed skepticism about the potential revenue impact of AI for Adobe, especially with the proliferation of generative AI tools in the market.

"Our primary concern is whether Adobe can actually charge a premium for its Firefly tools, or if AI has become a standard feature that must be included due to intense competition," Reitzes explained. He cited the surge of new entrants in image and video generation, including Runway, Getty, Google, and OpenAI.

Reitzes noted that current market expectations project a significant increase in Adobe’s net new annualized recurring revenue in the latter half of the year, driven by easier year-over-year comparisons, new product releases, and financial benefits from AI.

However, Reitzes and his team remain cautious, seeing no substantial upside to these consensus expectations. He stated that Adobe's forward price-to-earnings ratio of about 24 seems appropriate given the challenges ahead.

In premarket trading on Monday, Adobe’s stock was down 1.5%.

This downgrade occurs amidst broader pressure on software stocks, underscored by Salesforce Inc.'s recent negative outlook. "The impressive growth of software-as-a-service since the 2010s might be starting to unravel," Reitzes observed.