Adobe (NASDAQ:ADBE) is down 4.3% so far this morning after Rothschild & Co Redburn analyst Omar Sheikh issued a “Sell” rating on the stock. He trimmed his price target to $280 from $420, with the rationale that generative AI is causing Adobe to lose market share.
His price target is well below the current price of $375. A slide to $280 would mean a decline of nearly 25% on top of a 33.85% decline ADBE has seen in just the past year.
Adobe was considered to be a winner of AI technology as the company was quick to integrate it. Its “generative expand” and edit tools caused Photoshop to gain more market share and gain in popularity. That didn’t last long as AI editing and image creation tools got more popular.
It AI keeps getting more advanced, they may entirely replace many of Adobe’s software products. For many, that has already happened.
Adobe’s flagship product has been Photoshop, and the analyst is right that there’s less of a reason to subscribe to it when you can subscribe to an AI service and get your work done with a prompt.
Rothschild & Co. Redburn’s thesis mostly hinges on AI tools continuously getting better, to the point that they’ll be a total replacement of Adobe’s suite of software products. That is not the case today, and it’s still tentative whether or not generative AI will ever be as good.
That said, being “good enough” could be all it takes to cause Adobe to lose a significant portion of its revenue. I still don’t think ADBE stock is a sell.
Adobe is leaning into AI aggressively by integrating it into its products. Instead of losing market share to AI, it could be the place where people go for the best AI editing models. Adobe is more than just Photoshop, and the company itself has a massive amount of data it can use from its own user base to train its models. I wouldn’t consider it out of the race just yet.
ADBE also trades at just 24 times earnings compared to a historical median of over 50 times earnings. That should be enough of an AI discount.
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