Adobe tumbles after outlook disappoints Wall Street, TD Cowen cuts rating

Adobe’s (NASDAQ:ADBE) stock fell about 10% premarket on Thursday after the company’s fiscal 2025 outlook came below estimates, drawing mixed reactions from analysts.

Jefferies maintained its Buy rating and $650 price target on the shares but noted that, while fiscal fourth quarter FQ4 beat and FY25 guidance met buy-side bogeys, this was not the clearing event that investors had hoped for.

Analysts led by Brent Thill said that the stock dipped as fiscal 2025 revenue and Adobe’s guidance are below sell-side consensus, and questions persist on the pace of AI revenue monetization (though new Stock Keeping Units, or SKUs, will roll out in fiscal 2025, starting with a Firefly video premium tier).

However, the analysts noted that they expect Adobe to be an AI winner in the long term.

The analysts liked the fourth quarter beat and Strong Remaining Performance Obligations, or RPO, growth. They also liked that the fiscal 2025 guide hit investor bogeys, as the revenue outlook at mid-point 9% growth and Digital Media Annualized Recurring Revenue, or DM ARR, growth of 11% met buy-side bogeys, who were looking to this as a clearing event.

In addition, the analysts liked strong gen AI traction plus more SKUs coming, as well as share buybacks, which almost doubled — $9.5B in fiscal 2024, up from $4.63B in fiscal 2023.

However, Thill and his team said that they are watching several things, including the following — a) Fiscal 2025 guide below Street, driving lower estimates: revenue guidance at mid-point of 9% growth was below sell-side consensus; b) no revenue acceleration, flat margin at best for fiscal 2025.

The analysts noted that questions remain on how well Adobe can monetize the gen AI technology shift and the explosion in creative and marketing content. While management’s strategic outlook remains upbeat, investors still wait for the optimism to show up.

TD Cowen downgraded Adobe to Hold from Buy and reduced the price target to $550 from $625.

The analysts said that the fourth quarter Net New ARR beat guide by about 5%, its lowest percentage beat since fourth quarter fiscal 2022, and fiscal 2025 guidance of about 8% to 10% was below Street at +11%.

A prioritization of AI adoption over monetization is leading to continued growth deceleration trends, with the potential to fall into single digits, according to the analysts.

TD Cowen noted that pricing tailwinds fade next year, new go-to-market changes in the fiscal first quarter carry some disruption risk, and recent checks were more mixed.

Adobe’s management expects about 50bps of operating margin contraction versus the Street at flat, and ARR is expected to decelerate from 13% to 11%, the analysts added.

Morgan Stanley kept its Overweight rating and $660 price target on Adobe but noted that lack of acceleration in DM ARR continues to disappoint investors and raises concerns on weakness at the low end of the market offsetting strength at the high end.

Analysts led by Keith Weiss said that muted growth is already reflected, while monetization at the high end appears poised to ramp in 2025.

The analysts added that fourth quarter results beat consensus across revenues, ARR and margins, however the magnitude of the DM Net New ARR beat at 5% fell short of Buy-side expectations for 8%-9%. The initial guidance for fiscal 2025 DM ARR growth of 11% was in line with expectations, but revenue fell slightly short of Street ex-forex.

In addition, the analysts noted that lack of commentary on DM NNARR linearity plus a soft fourth quarter and fiscal 2025 revenue shortfall pressures investor confidence in generative AI innovation, improving the growth outlook.

However, Weiss and his team said that offsetting, better defining new tiered pricing strategies suggests Adobe is better poised to pull the lever on monetization into 2025.

Evercore maintained its Outperform rating and $650 price target on Adobe’s shares.

Analyst Kirk Materne and his team said that it was a solid quarter that was immediately lost in a guidance that seems reasonable (ex forex), but offers no real indication that Firefly and Adobe’s Gen AI products are positively starting to inflect. The initial DM NNARR guidance of about $1.9B or about 11% growth seems like a decent starting point in terms of delivering more material upside should Firefly monetization accelerate in a bigger way, they added.

However, Materne and his team noted that they are sticking with Adobe as a ‘reversion’ idea into 2025 but acknowledge that Adobe is likely a ‘show me’ story heading into the new year.

Related stocks: Autodesk (ADSK), Microsoft (MSFT), Wix.com (WIX) were largely flat premarket on Thursday.