Adobe ( ADBE ) stock fell about 8% on March 13 despite a record-breaking Q1 revenue after longtime CEO Shantanu Narine said he was stepping down after 18 years at the helm.
As investors responded to the leadership bombardment, ADBE fell below its 20-day moving average (MA), further accelerating Friday’s bearish move.
Against this year-to-date high, Adobe shares are now down nearly 25%.
Narayan’s announcement is particularly interesting for ADBE shares because he was the chief architect of the company’s highly successful shift to the Creative Cloud subscription model.
Additionally, the management change comes at an important inflection point where Adobe is facing threats from the launch of artificial intelligence (AI) and open source competitors.
Investors generally do not like leadership uncertainty during major technological changes.
In short, investors fear that the next executive may struggle to navigate the cycle of AI disruption that is currently squeezing Adobe’s once-insurmountable margins.
In 1Q1, ADBE adjusted its contracted operating margin by 10 bps, signaling its aggressive investments in AI research and development (R&D) and GPU infrastructure that are eating into historically high profitability.
Barclays analyst Sakit Kalia warns of a downside for Adobe shares.
In a research note dated March 13, Calia downgraded the software company to “equal weight,” arguing that its own AI success is hurting its photo/video marketplace business.
Customers who bought high-margin stock photos are now using tools like Adobe Firefly to create custom photos for free or at very low cost through credit packages.
This resulted in a $60 million decline in ADBE’s net new annual recurring revenue (NNARR) compared to management’s estimate of $460 million in Q1.
Note that the Adobe Relative Strength Index (14-day) at 37 reinforces that the bearish movement may not be over yet.
However, other Wall Street analysts disagree with Kalia’s cautious view of ADBE stock.
According to Barchart, the consensus rating on Adobe Inc remains at “Moderate Buy” with an average price target of around $403 indicating a potential upside of around 60% from here.
