Adobe ADBE shares fell sharply in trading on Tuesday after Morgan Stanley downgraded the creative software maker, warning that multiple strategic transitions are unfolding simultaneously and could complicate its ability to return to stronger growth.
The investment bank lowered its rating on Adobe from Equal-weight to Underweight and slashed its price target by more than one-third, from $365 to $240.
The stock fell about 2% after the opening bell, extending losses that have already pushed Adobe shares down nearly 31% this year.
The downgrade comes as investors continue to assess how artificial intelligence is reshaping the software industry and whether established players can defend their businesses against a growing number of AI-native competitors.
Multiple transitions raise execution risks
Morgan Stanley analyst Adam Wood said Adobe is navigating several major changes at the same time, increasing the execution risk for the company.
According to the note, Adobe is dealing with three concurrent transitions: an expansion of its freemium strategy, leadership changes involving both its chief executive officer and chief financial officer, and increased investment in artificial intelligence.
The company has been witnessing a leadership vacuum created by the concurrent search for a new CEO following Shantanu Narayen’s planned departure and the June exit of CFO Dan Durn, and a deliberate shift away from margin harvesting toward heavier AI reinvestment.
“While each transition may be manageable in isolation, their convergence raises the bar for execution at a time when other areas of software offer cleaner evidence of growth durability, operating leverage, and/or near-term AI monetization,” Wood wrote.
Morgan Stanley said Adobe’s decision to offer free access to more users has already affected recurring revenue growth.
The brokerage estimated the strategy reduced annual recurring revenue growth by roughly $500 million during the company’s second quarter.
The analysts added that the company’s shift toward freemium offerings, combined with management changes and higher AI spending, “elongate the path to durable annual recurring revenue (ARR) reacceleration.”
While Adobe’s core business serving creative professionals continues to enjoy a strong competitive position, Morgan Stanley believes some parts of its broader workflow are becoming increasingly vulnerable to AI-native alternatives for both consumer and enterprise users.
The bank acknowledged that Adobe’s lower valuation already reflects many of these concerns, but argued that the combination of simultaneous changes creates uncertainty over both the timing and strength of any recovery.
Workday also downgraded
Adobe was not the only software company to receive a more cautious assessment.
Morgan Stanley also initiated coverage of Workday with an Underweight rating and a price target of $145, sending the human resources software company’s shares down more than 2.75% in trading.
While the bank described Workday’s competitive moat as one of the strongest in enterprise software, it said the company’s artificial intelligence initiatives are unlikely to generate meaningful growth acceleration in the near term.
Mixed outlook for Salesforce and Intuit
The brokerage initiated coverage of Salesforce and Intuit with Equal-weight ratings, reflecting a more balanced outlook.
For Salesforce, Wood described the company as a “tale of two cities.”
He noted that strong momentum in products such as Agentforce and Slack has been offset by weakness in businesses including Commerce and Tableau, resulting in slower overall organic growth.
Morgan Stanley assigned Salesforce a price target of $185. Shares fell more than 1.9%.
On Intuit, which received a $335 price target, the bank said investor concerns about the company’s competitive moat have significantly weighed on its valuation.
“The concern is that LLMs will be able to file taxes and provide entry level accounting software at a much lower price,” the analysts wrote.
However, Morgan Stanley argued those fears are “overdone,” ranking Intuit 12th within its software coverage universe for moat strength, while noting the company is less prepared than some peers for the next stage of AI-driven software development.
Microsoft, Palo Alto, CrowdStrike highest conviction stocks
The ratings changes formed part of Morgan Stanley’s broader software sector report introducing what it called a “Moat & Journey” framework to assess software companies based on the durability of their competitive advantages and their readiness for the AI era.
The bank identified Microsoft, Palo Alto Networks, CrowdStrike, Cloudflare, Datadog, ServiceNow, Snowflake and Shopify as its highest-conviction Overweight-rated software stocks.
Morgan Stanley also downgraded Rapid7 and PagerDuty to Underweight and reduced ratings on Elastic, JFrog, NICE, Wix, BlackLine and Vertex to Equal-weight, citing either valuation concerns or a longer path toward AI-driven growth.
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