Adobe slips as Morgan Stanley downgrades, citing increased competition, limited earnings power
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Adobe (NASDAQ:ADBE) shares slipped on Tuesday as investment firm Morgan Stanley downgraded the cloud-based software company, citing a number of reasons, including increased competition and a shift towards a lower margin business, limiting its earnings power.
Analyst Keith Weiss moved his rating from overweight to equal-weight and slashed his price target to $362 from $591, noting that a maturing Creative Professional segment, increased competition in its Communicator and Consumer segments, as well as a shift towards its Digital Experience business are likely to mean earnings per share growth over the next three years may be in the "low teens," compared to previous growth.
Weiss noted that on the back of its Creative Cloud software suite and the move to subscription pricing, Adobe saw a 33% earnings per share compound annual growth rate from 2016 to 2021.
"However, we fear growth going forward will be materially slower, forecasting a 12% revenue and [earnings per share compound annual growth rate] for Adobe through [2024]," Weiss wrote in a note to clients, adding Adobe (ADBE) shares should likely see "a more balanced risk/reward profile" in the years ahead.
Adobe (ADBE) shares fell slightly more than 0.5% to $358.75 in premarket trading on Tuesday.
Delving deeper, it's likely that Adobe (ADBE) sees slower growth in its Digital Media segment, with Creative Cloud accounting for roughly 83% of the segment's annual recurring revenue, due to a more mature market in the professional segment. It's also likely that increased competition in the Consumer and Communicator segments comes from companies like Figma and Canva, which could force Adobe (ADBE) to have free tiers or lower their prices. 
It's also possible that as the pandemic moves into the latter stages, Adobe (ADBE) will face some comparisons for its Consumer segment, which appears "to have been a significant growth driver through 2020 and into 2021," Weiss explained.
The analyst also explained that operating margins, which expanded from 33.8% in fiscal 2016 to 46% in fiscal 2021, are likely to have "topped out" at that level, as Digital Media revenue growth slows down and Digital Experience revenue takes up the slack, albeit at a lower margin level.
Weiss also noted that management is "not making the stock easy to own in the current environment," as the company issued a "prudent" outlook when it reported quarterly results last week. They could have also slowed down investment to protect earnings per share and continued to buy back stock at elevated levels, something they have not done.
Following Adobe's (ADBE) most recent quarterly results, several Wall Street analysts worried about the lowered guidance, including one who called the outlook "controversial."
Analysts have been positive on Adobe's stock (ADBE). It had an average rating of BUY from Wall Street analysts, while Seeking Alpha authors rate it slightly lower BUY. Conversely, Seeking Alpha's quant system, which consistently beats the market, rated ADBE a HOLD.