Morgan Stanley Keeps Adobe Underweight as Inflection Lacks

Morgan Stanley maintained an Underweight rating and a $240.00 price target on Adobe following third-quarter earnings, citing limited evidence of a fundamental growth inflection despite the software maker topping revenue expectations.

For the quarter, Adobe reported revenue growth of 13% year-over-year, or 12% in constant currency, beating company guidance by roughly 1%. The software provider posted non-GAAP earnings of $6.13 per share on total revenue of $6.76 billion, according to financial results.

Annual Recurring Revenue and Net New Metrics

Total annual recurring revenue reached $27.5 billion, while net new ARR came in at approximately $400 million. Although net new ARR exceeded initial expectations, it represented a 38% decline compared to the same period in the prior year as customer demand increasingly routes through freemium experiences.

Within the digital media and creative segments, adoption metrics showed mixed trajectories. AI-first ARR grew over 150% to surpass $650 million, and Firefly App and credit-pack ARR expanded by 40% quarter-over-quarter.

Guidance Adjustments and Forward Outlook

Management raised its full-year fiscal 2026 revenue guidance by approximately $50 million. However, the company left fiscal 2026 ARR growth guidance unchanged at 10.2% and maintained its operating margin target at 45%.

Fourth-quarter revenue and operating margin projections arrived modestly below consensus estimates on Wall Street, prompting continued caution among institutional analysts regarding near-term acceleration.

What Is an Underweight Rating?

In equity research, an Underweight rating indicates that an analyst expects a specific stock to underperform the total return of a benchmark index or the broader sector over the next 12 to 18 months. Maintaining this stance despite a revenue beat underscores analysts' focus on underlying growth velocity rather than headline beats alone.

The debate centers on whether artificial intelligence monetization can scale quickly enough to offset deceleration in legacy software subscriptions. While tools like Firefly gain traction among digital creators, financial institutions continue to monitor net new ARR contraction and forward guidance before altering long-term valuation models.