Adobe struggles to assure investors that it can thrive in AI era

(Bloomberg/Brody Ford) — Adobe Inc. brought together 10,000 marketers, filmmakers and content creators to its annual conference this week to persuade them that the company’s software products are adapting to artificial intelligence and remain the best tools for their work.

But it’s Adobe’s investors, rather than its users, who are the most skeptical that generative AI technology won’t disrupt the company’s business as the top seller of software for creative professionals.

Despite a strong strategy, Adobe is “at risk of structural AI-driven competitive and pricing pressure,” wrote Tyler Radke, an analyst at Citigroup.

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The company’s shares have lost about a quarter of their value this year as AI tools like Google’s video-generating model Veo have gained steam. In an interview with Bloomberg Television earlier this week, Adobe Chief Executive Officer Shantanu Narayen said the company is undervalued as the market is focused on semiconductors and the training of AI models.

Adobe’s stock decline mirrors that seen by other application software leaders like Salesforce Inc. or Workday Inc. With those companies, much of the investor malaise is driven by a sense that useful adoption of AI tools is taking longer than initially anticipated in many industries.

By contrast, Adobe’s core market of media creation is being transformed rapidly by AI. While AI features in apps like Adobe’s Photoshop have already been used tens of billions of times, many of the hit tools are made by somebody else.

Scrolling through social media, you’re likely to see a video made by OpenAI’s Sora. If you’re invited to a friend’s party, odds are good the poster was generated with a template on Canva Inc. It’s becoming easier to put together media without using a professional tool like those made by Adobe, Radke said.

Many of Adobe’s announcements this week at its conference in Los Angeles were geared toward making sure AI-forward creators stay on its platform. The company will now integrate models from competitors like Alphabet Inc.’s Google and OpenAI into tools such as Photoshop. The move sets up Adobe as a bit of an AI reseller — buying bulk quantities of the other AI models to offer to its own customers.

It’s also a a pivot in Adobe’s AI positioning. The company has long offered Firefly, a proprietary AI model built to avoid copyright infringement or offensive content. Adobe has argued that customers would select Firefly as a safer alternative to third-party models like those from OpenAI.

But now, “people are getting more comfortable with the idea that models are trained on a large number of things,” said Ely Greenfield, technology chief for Adobe’s creative business. Many customers use Firefly for work that will actually be published, and third-party models for brainstorming, Greenfield added. Adobe has said it remains committed to making its own Firefly models, which are well-suited to specific tasks within apps.

Customers at the convention were excited about being able to use third-party models within Adobe products, wrote Jackson Ader, an analyst at KeyBanc. “We welcome the strategy as we have been skeptical of Adobe’s ability to compete on the like-for-like merits of AI image and video generation.”

AI-first products are making Adobe more than $250 million per year right now. But the company argues that this doesn’t capture the technology’s full impact and has introduced a more expansive and squishy metric: AI-influenced revenue. By the company’s telling, about $5 billion of annual revenue is boosted by AI in some way, whether by letting Adobe raise the price of its products or reducing customer churn.

The near-term outlook for Adobe’s stock is somewhat mixed, but the event this week was still “another step toward addressing the ‘existential risk’ question as it relates to Gen AI tools in the market,” wrote Kirk Materne, an analyst at Evercore ISI.

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