The software giant beat Wall Street’s expectations for its fiscal second quarter, reporting non-GAAP earnings of $5.96 per share against a consensus of about $5.82, on record revenue of $6.62 billion that topped the roughly $6.45 billion analysts had penciled in. Revenue grew nearly 13% from a year earlier. On paper, it was a clean beat. In the market, it was anything but.
Shares slid about 7% to the low $200s, sinking near a 52-week low. The stock has now shed close to half its value over the past year, weighed down by a growing fear on Wall Street that generative AI could erode demand for Adobe’s creative software rather than fuel it.
A risky pivot to freemium
The bigger story is a strategy shift that rattled investors. Adobe told analysts it plans to lean hard into a freemium model, offering basic AI and creative tools free to pull in a much larger user base and convert those users into paying customers later. The trade-off is immediate, as management acknowledged the move will dampen annual recurring revenue in the back half of the fiscal year, trimming its organic second-half ARR outlook.
The early adoption numbers are eye-catching. Adobe said its AI-first ARR tripled to more than $500 million, monthly active users of Acrobat and Express climbed to 850 million from 700 million a year ago, and its creative freemium base nearly doubled to more than 90 million. But the question hanging over the stock is whether Adobe can actually turn all those free users into paying ones, especially with AI rivals crowding the space.
Two C-suite seats in flux
Adding to the unease, Adobe is navigating leadership turnover at the worst possible moment. Two of its most senior roles are in transition. First, longtime chief executive (1) Shantanu Narayen announced earlier this year that he will step down once a successor is found, shifting to board chair. Second, chief financial officer (2) Dan Durn is now departing as well, with Steve Day stepping in as interim CFO.
That leaves the company steering a pivotal AI transition without permanent leadership in two of its three top jobs, a combination investors tend to punish.
Wall Street slashes its targets
The analyst community responded with a wave of price-target cuts, even from firms that still like the stock. JPMorgan trimmed its target to $340 from $420 but kept an Overweight rating. UBS cut its target to $225 from $260, holding a Neutral view and warning that AI has dented Adobe’s pricing power among individual and lower-end customers. Stifel downgraded the stock to Hold from Buy.
The reductions kept coming across the board. BMO Capital moved to $230, TD Cowen to $245, Piper Sandler to $240, Bernstein SocGen to $379 and KeyBanc all the way down to $195, the last citing the CFO exit. Oppenheimer and Citizens, meanwhile, held steady at the equivalent of a neutral stance. The mean target has collapsed from around $565 at the start of 2025 to near $327 today.
A bargain or a value trap
For all the gloom, Adobe’s underlying business is still humming. The company posted gross margins around 89%, raised its full-year revenue guidance to roughly $26.5 billion to $26.6 billion and now trades at a relatively modest earnings multiple. Whether that makes the stock a bargain or a value trap depends entirely on a single question: can Adobe prove that AI will feed its business rather than eat it? Until investors are convinced, the selling pressure may not let up.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. The author and publication are not registered investment advisors and do not provide personalized investment recommendations.