TD Cowen downgrades Adobe shares as earnings repot flags growth risks

Investing.com -- Following its disappointing fourth-quarter earnings, TD Cowen cut its rating on Adobe (NASDAQ:ADBE) shares from Buy to Hold, and reduced the price target on the stock from $625 to $550.

The investment bank pointed out a series of challenges that could impact Adobe's growth, including a deceleration trend in growth and potential disruptions from go-to-market (GTM) changes.

Adobe's fourth-quarter net new annualized recurring revenue (ARR) of $578 million, a 2% year-over-year increase, exceeded guidance by approximately 5% but fell short of the trailing twelve months' average beat.

The growth guide for the fiscal 2025 year (FY25) of 8-10%, inclusive of a 50-75 basis points foreign exchange headwind, was also below the Street's expectation of 11%. Management anticipates an approximate 50 basis points contraction in operating margin, contrary to the Street's forecast of a flat margin.

Moreover, ARR is expected to decelerate from 13% to 11%.

TD Cowen notes that Adobe is prioritizing the adoption of AI technologies over immediate monetization. While certain AI-driven monetization efforts are seeing traction, such as GenStudio in the enterprise and AI Assistant in Acrobat, these initiatives are currently small in terms of revenue.

Adobe's primary focus is on increasing the adoption of its free Express users to build habitual usage before introducing more monetization strategies.

Analysts believe Adobe faces several headwinds in 2025, including the end of pricing tailwinds in the first half of the year, GTM changes in the first quarter that could lead to some disruption, and weaker growth trends indicated by partner checks.

“The latter remains a key investor overhang that is likely to linger,” analysts highlight.

Their downgrade reflects concerns that Adobe's strategy of expanding its user base with free offerings before increasing monetization efforts may not significantly improve growth in the near term.

With the growth rate potentially falling into single digits, the firm anticipates that this could put pressure on Adobe's valuations.

Following the downgrade, Adobe's stock dropped 11% in after-hours trading to an approximate 23x enterprise value to calendar year 2025 estimated free cash flow.

TD Cowen expects the stock to remain range bound.