Top investment bank resets Adobe target as AI strategy backfires

Adobe (ADBE), the software maker behind Photoshop and Acrobat, beat earnings estimates for its May quarter and lifted its full-year guidance.

However, the company told Wall Street that it would grow a bit more slowly this year, even as it reported record sales.

Investors sold ADBE on the news, pushing the stock to its lowest level in a year.

The reason for Adobe’s slow growth projection is tied to a bet the company is making on how customers will use its artificial intelligence tools.

JPMorgan reset its ADBE target because of it.

Why JPMorgan cut its Adobe price target after a strong quarter

JPMorgan lowered its price target on Adobe to $340 from $420 while keeping its Overweight rating, which means the firm still expects the stock to beat the market, MarketScreener reported.

The cut came right after the second-quarter report, and the trigger was guidance.

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Adobe lowered its forecast for organic annual recurring revenue growth, the steady subscription income Wall Street watches most closely, by about 2 percentage points from roughly 10.2%.

JPMorgan read the move as Adobe ramping up near-term spending to secure a bigger payoff in the future.

Which means the company is giving up subscription dollars right now to capture a larger long-term opportunity from AI.

However, while the logic makes sense, it requires investors to be patient, but the market was already nervous about Adobe and was in no mood to wait.

What Adobe actually reported in its second quarter

The second quarter looked strong.

Adobe posted record revenue of $6.62 billion, up 13% from a year earlier, and non-GAAP earnings of $5.96 a share, both ahead of estimates, according to the company’s earnings release on Business Wire.

Total annual recurring revenue reached $27.10 billion, and the slice tied to Adobe’s newest AI products more than tripled from a year ago to above $500 million, according to the SEC filing.

Adobe’s second quarter at a glance

• Record revenue of $6.62 billion, up 13% year over year.
• Non-GAAP earnings of $5.96 a share, above the $5.82 consensus, TipRanks noted.
• Full-year revenue and profit targets raised.
• Organic recurring revenue growth guidance cut by about 2 percentage points.

Why Adobe’s freemium AI bet rattled investors

Adobe is leaning into a freemium approach, which means offering users free access to additional AI features in hopes of converting them into paying customers later.

According to Investing.com, management admitted the shift dampens recurring revenue in the short term, and said its stock photo business fell more than expected.

The strategy is unproven, and the timing made it harder to accept.

Related: JPMorgan resets Broadcom stock price target

Chief Financial Officer Dan Durn is leaving on June 15 to join Marvell Technology, the second senior exit in three months after Chief Executive Shantanu Narayen said he plans to step down once a successor is found.

With no permanent CEO and now no permanent CFO, investors are pricing in real execution risk during a pivotal AI shift.

The stock fell about 7% the day after the report and is down roughly 18% over five trading days.

How Adobe stock stacks up against the market and its peers

Adobe’s sell-off stood out from the broader market, which was climbing.

On the day Adobe slid, the S&P 500 rose about 1.75%,and theNasdaq gained about 2.54%, making Adobe a clear outlier.

ADBE has lost roughly half its value from its 52-week high near $405, and analysts have warned for months that cheaper, AI-native creative tools are eating into its turf.

Rivals such as Autodesk and Workday fell the same day, though none as hard as Adobe.

What has to go right for Adobe’s AI bet to pay off

Investors who choose to be patient are counting on the freemium plan working.

Adobe needs the free users it is attracting now to become paying subscribers later, and it needs its AI products to keep compounding fast enough to replenish the recurring revenue it is giving up now.

What needs to happen next

• Free users convert to paid plans at a healthy rate.
• AI-first recurring revenue keeps growing well beyond $500 million.
• Adobe names a permanent CEO and CFO to steady the strategy.
• The stock photo and Creative Cloud businesses stabilize.

Wall Street has not written off Adobe Stock.

The average analyst price target sits near $321, well above where shares trade, and even after a wave of target cuts, most firms kept buy or hold ratings, TipRanks noted.

JPMorgan’s $340 target still points to meaningful gains if the plan delivers.

For investors, the takeaway is direct. Adobe is cheaper than it has been in years, trading around 12 times earnings, but it carries real risk while leadership is unsettled and the freemium bet is untested.

Anyone buying now is wagering that the long-term AI payoff arrives before patience runs out. This is not investment advice, and the plan could still stumble if those free users do not convert.

Related: Morgan Stanley slashes targets on 3 software stocks after earnings