Adobe's stock may not be an 'AI loser,' but this analyst sees a number of reasons to steer clear

By Hannah Pedone

AI won't necessarily devastate Adobe's business, but it does invite various investor questions that a William Blair analyst doubts will get resolved in the near future

William Blair analyst Arjun Bhatia downgraded shares of Adobe to perform from outperform.

Adobe's stock has taken a beating this year, and a William Blair analyst says he doubts trends will reverse soon.

William Blair's Arjun Bhatia downgraded shares of Adobe (ADBE) to perform from outperform on Thursday, saying that the company is facing artificial-intelligence-related pressures that will be hard to shake.

The software sector in general has been weighed down by fears that AI will diminish the need for traditional software. While Adobe's stock is rising 2.7% on Thursday, it's down 30% so far this year.

"To be clear, we are not calling Adobe an 'AI loser,'" he wrote in his note to clients. But AI has compounded the pressure on Adobe, which had already been facing heightened competition from Canva and Figma (FIG), two traditional design rivals.

Bhatia added that "AI has taken the creative market by storm, and essentially overnight, democratized the highly technical skills creative professionals had built."

That leaves various nagging questions for Adobe investors - ones that are "are unlikely to be resolved in the near term," according to Bhatia.

A big unknown, in his view, is what happens to Adobe's "very healthy" operating margins in the mid-40% range. "A margin profile this rich invites competition (arguably, this has happened already, especially as AI has created wedge for new entrants), which then has the potential to erode excess margins," he wrote.

It's also unclear how effectively Adobe will be able to maintain its pricing power and differentiate its business, Bhatia added. The company is placing renewed emphasis on its "freemium" offerings, but that move presents growth challenges in the near term.

See also: 7 software stocks set to thrive in the face of AI uncertainty

The company's recent CEO transition hasn't helped investor morale either, he noted. Earlier this month, Adobe announced Shantanu Narayen would step down after 18 years in the role.

With Bhatia's downgrade, there are as many analysts with neutral-equivalent ratings on Adobe's stock as there are with buy-equivalent ratings, according to FactSet data.

Jefferies analyst Brent Thill, who has a hold rating on Adobe shares, recently expressed concern that users who once used Adobe's stock imagery for their work are increasingly using generative AI to create content. He thinks this was one factor that prevented Adobe from showing an acceleration in annual-recurring-revenue growth last quarter.

Read more: Microsoft's stock is having its worst quarter in 17 years - and there may be no quick fix

-Hannah Pedone

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