Adobe Stock Falls After Downgrade. The Case to Sell as AI Bites.

Rothschild & Co Redburn downgraded Adobe to Sell from Neutral in a research note. (Dreamstime)

Adobe stock was falling Wednesday after the struggling software giant received its first Sell rating in months.

The shares were downgraded from Neutral by Rothschild & Co Redburn analyst Omar Sheikh. He also dropped the target price to $280 apiece from $420 in a research note Wednesday, arguing that generative artificial intelligence tools are eroding Adobe’s advantages in content creation software.

The stock was down 4.3% at $375.42.

Adobe, the maker of creative and document-management solutions including Photoshop and Acrobat, has had a grip on all phases of the content-creation process among its professional users—from ideation to editing to workflow.

But the proliferation of generative AI tools that can turn text into images and videos is already threatening the company’s position, Sheikh argued. AI platforms such as Imagen, Google Deepmind’s image generator, and Sora, OpenAI’s video-generation model, are now the go-to for professionals beginning creative projects, the analyst noted.

“Editing and workflow look likely to be the next areas of disruption, which will further call into question Adobe’s ability to sustain pricing power,” Sheikh wrote. That’s a problem for a company that has used price hikes as a growth driver among professional users.

Adobe already lost out on one AI-powered platform that could have added to its capabilities, as a $20 billion cash-and-stock deal to acquire the design software company Figma collapsed in December 2023. The companies, which had announced the proposed merger in September 2022, ultimately saw no path to regulatory approval in the European Union and the U.K.

Any faint hopes of a second attempt to acquire the start-up were dashed Tuesday afternoon, when Figma filed paperwork for a proposed initial public offering.

Adobe was having a torrid year even before the sour news about Figma and Wednesday’s downgrade from Redburn. As of Tuesday’s close, the stock was down 12% so far in 2025 and 31% over the past 12 months despite a couple of earnings beats to start the year.

Still, Wall Street has largely remained bullish on the company. Of the 40 analysts polled by FactSet, 26 hold a Buy or Overweight rating for the stock, and no firm beside Redburn has issued a Sell or equivalent rating since April. Adobe’s average price target on Wall Street is $484.41, per FactSet.

Sheikh conceded that Adobe may be able to use its enviable cash flow to engineer a strategic pivot toward AI. In particular, the company could acquire an image-generation model, create its own frontier model with AI editing features, and build AI workflow tools for users. Management could also make more drastic moves such as spinning off a subsidiary focused on beating new competitors or even selling the company.

Either way, Adobe must clear some major hurdles ahead, Sheikh said.

Write to Nate Wolf at nate.wolf@barrons.com