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On Monday, June 10, 2024, Adobe Inc. (Nasdaq: ADBE) faced a significant setback as Melius Research downgraded the stock from Buy to Hold, triggering a 1.1% drop in premarket trading. The downgrade was primarily driven by concerns about the broader enterprise software industry’s challenges with artificial intelligence (AI), which could pose a long-term threat to Adobe’s business model.

Melius analyst Ben Reitzes expressed apprehension about the rising competition from AI-first companies and the increasing difficulty in monetizing AI features, given the significant price hikes in software-as-a-service (SaaS) products over the years.

Reitzes also noted that AI could disrupt traditional databases by increasing the importance and usability of unstructured data, further complicating the landscape for established players like Adobe.

Q2 earnings preview

This downgrade comes at a crucial time for Adobe, as the company is set to report its Q2 2024 earnings on Thursday, June 13, after the market closes. Analysts are expecting positive results, with projected earnings per share (EPS) of $4.39 on revenue of $5.29 billion, indicating year-over-year growth.

Adobe has guided for quarterly revenue between $5.25 billion and $5.30 billion and adjusted EPS in the range of $4.35 to $4.40. In the run-up to the earnings report, Adobe’s AI initiatives have been a focal point.

The company’s Firefly AI model, which has generated over 7 billion images, continues to integrate deeply into Adobe’s creative tools, enhancing features like Generative Fill and Text to Image in Photoshop.

Oppenheimer cuts price target, Appaloosa adds the stock

Investment firms have mixed views on Adobe’s prospects. Oppenheimer maintains an Outperform rating but recently lowered its price target to $580 from $660, citing potential reacceleration in the second half of 2024 as pricing pressures ease and AI monetization gains traction. On the other hand, Appaloosa Management, led by billionaire David Tepper, added 350,000 shares of Adobe in the first quarter of 2024, signaling confidence in the company’s long-term potential.

Despite the recent downgrade and ongoing concerns about AI’s impact, Adobe remains a dominant player in the creative software market. Its comprehensive suite of tools and strong position in the content creation and distribution supply chain provide a solid foundation for future growth. The company’s strategic focus on integrating AI capabilities and maintaining best-in-class margins positions it well to navigate the evolving landscape.

Valuation

Valuation metrics for Adobe reveal a mixed picture. The stock has been underperforming, down 23% year-to-date and over 35% off its highs, bringing its valuation to more reasonable levels.

Adobe’s adjusted free cash flow yield, taking into account significant share-based compensation and the Figma acquisition break-up fee, is around 3%. With a robust balance sheet and a $25 billion share repurchase program, Adobe appears well-equipped to enhance shareholder value.

As we await Adobe’s upcoming earnings report and further developments in its AI strategy, the key question remains: How will these factors influence the stock’s price trajectory? Now, let’s see what the charts have to say about Adobe’s technical outlook and potential price movements.

A cautionary note for bullish investors

Adobe’s stock is currently in a bearish downtrend, as evident from its daily charts. This is not an isolated event; the stock experienced a significant downtrend from November 2021 to September 2022, crashing from above $680 to under $280.

(Click on image to enlarge)

ADBE chart by TradingView

In the current downtrend, which began in February this year, the stock has fallen from a high of nearly $640, lower than its previous all-time high of above $680—an indication of strong bearish momentum. Given this trend, bullish investors should exercise caution and avoid buying at current levels, as further declines are possible. A long position should only be considered only if the stock breaks above its 100-day moving average.

For traders looking to short Adobe’s stock, current levels present an opportunity ahead of earnings, with a recommended stop loss at $497. If the downward trend continues, the next support level is around $364, where profits can be taken.

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