Adobe Inc. (ADBE) shares rose about 4.6% on Tuesday even after Bank of America reinstated coverage of the software company with an Underperform rating.
The brokerage argued that generative artificial intelligence is weakening Adobe’s competitive position despite the stock trading near the lower end of its historical valuation range.
Bank of America set a price target of $190, valuing the company at seven times its projected 2027 enterprise value to free cash flow (EV/FCF), below the roughly 9.7-times average multiple for a broader group of software companies.
The brokerage said Adobe’s valuation alone is not sufficient to support a more constructive investment stance as the company faces increasing competition from AI-native products.
AI competition raises questions over growth
Bank of America analysts, led by Tal Liani, said the key issue facing Adobe is whether the company can accelerate growth in an AI-driven software market.
The analysts wrote that the central question is whether Adobe “can reaccelerate growth in the age of AI.”
While Adobe has seen adoption of its AI offerings, the brokerage said those products have yet to generate a meaningful financial contribution.
According to the report, AI-first annual recurring revenue (ARR) currently accounts for less than 2% of Adobe’s total ARR.
The bank forecasts total revenue growth slowing from 10.5% in 2025 to 8.8% in 2027, with “no clear path to near-term reacceleration.”
The report also noted that AI-related competitive risks vary across Adobe’s customer base.
Casual users and non-professional creators are viewed as more vulnerable because AI-generated content can often replace paid subscriptions.
Professional and enterprise customers are expected to remain more resilient because they require precision and integrated workflows.
However, the analysts cautioned that “not all professional users need the full Adobe workflow,” leaving some professionals and single-application users exposed to lower-cost AI alternatives.
Leadership transition and product pressures remain in focus
Bank of America also highlighted challenges facing Adobe Stock, the company’s marketplace for images and videos.
Management has said Adobe Stock has declined for two consecutive quarters, although it did not disclose specific figures.
The brokerage said the weakness reflects the broader risk that free or inexpensive AI tools could reduce demand for Adobe’s higher-margin legacy offerings while limiting future seat expansion.
The analysts also pointed to recent executive changes as another source of uncertainty.
They said the simultaneous departures of CEO Shantanu Narayen and CFO Dan Durn “heightens risk around strategy, continuity, and leadership stability” as Adobe navigates its AI transition.
Although the bank expects Adobe to maintain strong profitability, including a free cash flow margin approaching 39% by 2028, it believes there is “limited multiple expansion without clear evidence of AI monetization and growth acceleration.”
Historical performance shows mixed dip-buying results
Historical data also suggests that buying large pullbacks in Adobe shares has produced inconsistent results.
Since 2010, the stock has experienced 12 declines of at least 20% within a 30-day period.
Only six of those events generated positive returns over the following year. The median one-year return after those declines was negative 4%, while investors experienced a median maximum drawdown of 17% before any recovery.
Despite that track record, Adobe’s underlying financial performance remains solid.
The company reported 11.5% revenue growth over the last 12 months, with a three-year average growth rate of 11%. It also generated an operating cash flow margin of 41.6%, highlighting strong profitability and cash generation.
Creative Freemium monthly active users increased from 50 million to 90 million year over year.
Adobe currently trades at a price-to-earnings ratio of about 12, compared with roughly 25 for its peer benchmark, although Bank of America maintained that stronger evidence of AI-driven growth will be needed before adopting a more positive view on the stock.
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