Melius analysts downgraded Adobe (NASDAQ:ADBE) to Hold from Buy, setting a price target of $510 on the stock, ahead of the company’s upcoming Q2/24 earnings report, scheduled on June 13.
The analysts noted that the enterprise application software sector is currently facing challenges due to the rise of AI. They drew parallels to the 2010s shift from on-premise hardware to cloud computing, suggesting that the impact of AI on software could be similarly prolonged. This view is influenced by recent downward revisions from high-profile software companies like Salesforce, Workday, and MongoDB.
The analysts elaborated on several factors contributing to these challenges. Firstly, AI technology, driven by companies like Nvidia and major cloud platforms, is enabling faster and more efficient software creation, customization, testing, and deployment. Secondly, new AI-centric coding tools are making it easier for smaller competitors to emerge with fewer engineers, a trend that is likely to accelerate. Thirdly, many SaaS companies have been increasing prices over the years, but the current economic climate, marked by inflation and shifting priorities, makes it difficult to charge extra for AI enhancements. Finally, AI-driven productivity improvements threaten the traditional “seat model” used by many software companies, potentially leading to a shift towards outcome-based business models.
The analysts also highlighted AI’s potential to disrupt traditional databases as unstructured data becomes more important and usable. This disruption could impact companies like Snowflake and certain aspects of Oracle, as well as ongoing effects on Salesforce and Workday.