ADBE Stock Tumbles After Double Downgrade – Adobe Must Nearly Double New Recurring Revenue To Hit Targets, Wells Fargo Says

Wells Fargo downgraded the stock to 'Underweight’ from ‘Equal Weight’ and cut its price target to $225 from $270.

• Wells Fargo questioned the quality of Adobe’s projected 10.2% full-year annual recurring revenue growth.
• The firm estimated that Adobe’s organic net new annual recurring revenue declined by more than 40% in the third quarter.
• It said Adobe would need nearly double its net new ARR in the fourth quarter to meet its full-year targets.

Shares of Adobe (ADBE) declined in morning trade on Monday after getting a double downgrade from Wells Fargo on concerns that the company’s underlying growth is deteriorating, rather than just experiencing a temporary slowdown. 

Wells Fargo downgraded ADBE stock by two notches, from ‘Equal Weight’ to ’Underweight,’ according to TheFly. The firm also cut its price target to $225 from $270, implying a potential downside of over 5% from current levels. 

ADBE stock fell around 2% in morning trade and was among the top trending tickers on Stocktwits at the time of writing. Retail sentiment on the platform around the shares remained in ‘bearish’ territory over the past day.  

Why Did Wells Fargo Downgrade Adobe Stock?

According to Wells Fargo, the meaningful cracks in Adobe’s growth are now starting to show. It believes that Adobe is getting a boost from Semrush, but the core business is growing much more slowly.

The firm pointed to Adobe’s full-year forecast of around 10.2% annual recurring revenue (ARR) growth after its second-quarter (Q2) results, even though it had added about $480 million in revenue contribution from its acquisition of Semrush, which makes the growth look less impressive. 

Why Adobe’s Core Growth Is Under Pressure

A company’s ARR is the annualized value of recurring subscription revenue. It comprises two things: inorganic growth and organic growth. The former comes from acquisitions, like Semrush, and the latter comes from existing operations.

Wells Fargo estimated that Adobe's organic net new annual recurring revenue (NNARR) declined by more than 40% in the third quarter (Q3). 

The firm also estimated that Adobe needs to generate nearly twice as much net new ARR in the fourth quarter (Q4) to meet its full-year targets. It stated that this could be difficult for the company due to competitive pressure and pricing constraints. 

How Is Retail Feeling About ADBE Stock?

Wells Fargo’s double downgrade comes as chatter about an open-source project called ArtCraft and the kind of competition it poses to Adobe has caught investors' attention. 

ArtCraft has been called out for trying to recreate Adobe’s Creative Cloud apps, but without Adobe’s subscription model. It is free, AI-assisted, and directly targets Adobe’s dominant creative-software franchise.

One Stocktwits user stated that free alternatives could pressure Adobe’s lower-end customer base, including students and freelancers, while large companies would be harder to displace because of their security, compliance, legal, and collaboration requirements.

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Another user viewed the recent weakness as a short-term reaction to the ArtCraft discussion and indicated plans to buy the stock after waiting a couple of days.

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ADBE stock has fallen nearly 30% this year. 

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