Adobe Downgraded to Sell on Growth Concerns. ‘Meaningful Cracks Now Starting to Show.’

Adobe drops Monday after receiving a double downgrade from Wells Fargo, which cited worsening organic growth, executive instability, and a loss in pricing power. (David Becker/AP Images for Adobe)

Key Points

• Wells Fargo downgrades Adobe stock to Underweight from Overweight and lowers its price target to $225 from $270.
• Analyst Michael Turrin cites worsening organic growth, execution risks from a management transition, and a shift to freemium acquisition.
• The analyst estimates that Adobe’s net new annual recurring revenue declined over 40% year over year in the fiscal third quarter.

Times have been tough for Adobe .

The stock dropped after receiving a double downgrade from Wells Fargo. Analysts led by Michael Turrin downgraded the shares Monday to Underweight, an equivalent to Sell, from Overweight while lowering the price target to $225 from $270.

Turrin cited worsening organic growth, execution risks during a major management transition, and a fundamental shift from pricing power to freemium acquisition, or offering basic software features for free to eventually convert users to paying subscribers, that has pressured growth.

Shares of Adobe fell 3.2% to $234.61 Monday. The stock has fallen 33% this year and was on pace for its worst year since 2022, according to Dow Jones Market Data.

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Adobe’s fiscal third-quarter earnings, which were released Sept. 10, were “muted,” Turrin wrote. He estimated that Adobe’s net new annual recurring revenue, which represents the new recurring subscription value during the quarter, declined more than 40% from the year before.

Turrin lowered his expectations for Adobe. Management’s guidance for the fiscal year implies that net new annual recurring revenue must double quarter over quarter to meet targets. Reaching those goals, however, will be unlikely given current operating trends, Turrin noted.

That slowdown in growth has signaled to Turrin that “more meaningful cracks are now starting to show in the Adobe growth profile.”

Turrin also sees execution risks as Adobe currently manages an executive shakeup. The company announced in early September that Anil Chakravarthy will take over as CEO in December after saying in March that Shantanu Narayen would be stepping down after 18 years. Chakravarthy is currently president of Adobe’s Customer Experience Orchestration business and worldwide field operations.

Turrin expects Adobe to opt for “incremental conservatism” when it comes to setting its fiscal 2027 outlook, which likely could make upcoming financial targets less predictable.

Adobe’s dwindling pricing power has added to the headwinds. The company has delayed increasing prices for its core Creative Cloud suite to prioritize freemium user acquisition in a highly competitive market. That price freeze, on top of a shrinking Adobe Stock business in which users can buy royalty-free stock photos, could represent a drag of nearly $390 million on annual recurring revenue.

Write to Mariapaula Gonzalez at mariapaula.gonzalez@barrons.com

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