TD Cowen Downgrades Adobe Shares

Investing.com — Following disappointing fourth-quarter earnings, TD Cowen downgraded Adobe (NASDAQ: ADBE) from Buy to Hold, lowering the price target from $625 to $550.

TD Cowen highlighted challenges that could hinder Adobe's growth, including a trend of deceleration and potential disruptions from go-to-market (GTM) changes. Adobe reported a net new annualized recurring revenue (ARR) of $578 million, representing a 2% year-over-year increase, which exceeded guidance by 5% but fell short of the average for the past twelve months.

The growth forecast for fiscal 2025 (FY25) is set at 8-10%, including a 50-75 basis points foreign exchange headwind, below Wall Street's expectation of 11%. Management also anticipates a 50 basis points contraction in operating margin, contrary to expectations for flat margins. The ARR is predicted to decelerate from 13% to 11%.

TD Cowen observed that Adobe is focusing on AI technology adoption rather than immediate monetization. While some AI-driven initiatives, such as GenStudio and AI Assistant in Acrobat, are gaining traction, revenue from these efforts remains small. Adobe aims to boost its free Express users to foster habitual usage before implementing monetization strategies.

Analysts note that several challenges await Adobe in 2025, including the end of pricing benefits in the first half of the year, disruptive GTM changes in Q1, and weaker growth trends based on partner feedback. These issues constitute a significant investor concern.

The downgrade reflects worries that Adobe's strategy of enlarging its user base with free offerings before monetization may not enhance growth in the short term. With the growth rate potentially dipping into single digits, TD Cowen believes this could pressure Adobe's valuations. After the downgrade, Adobe's stock fell 11% in after-hours trading, resulting in a valuation of approximately 23x enterprise value to the estimated free cash flow for 2025. TD Cowen anticipates that Adobe's stock will remain range-bound.