This will be Adobe’s biggest challenge in 2025

This story originally appeared in The Technology Letter and is republished here with permission. It’s back to pattern for Adobe, which had been selling off for many quarters on its earnings reports, then had a big jump up at the last report, in June, and is now down nine percent Friday, at $532.28, following Thursday evening’s earnings report. The proximate cause for the decline is the flip side of what drove the shares up in June. The June report saw a better-than-hoped-for forecast for what’s called “net new Digital Media ARR,” the expected value over twelve months of recurring revenue in the company’s main line of business, “Creative Cloud.” Last night’s forecast, in contrast, fell slightly short. The debate today is how seriously to take that shortfall. Don’t take it too hard, advises Mark Moerdler of Bernstein, who reiterates his Outperform rating on the stock, and cuts his price target to $644 from $660. He acknowledges that investors are “baffled” because the company in June led them to believe the business was “accelerating” in the latter part of this year. But, the reasons it hasn’t sped up are minor, in his view, such as foreign exchange effects during the quarter, and also the retail extravaganza known as “Cyber Monday” falling outside of the quarter. All these things made the forecast “optically dimmed,” he writes—which is one of the greatest euphemisms I’ve heard in a while! Still, Moerdler chides management for not communicating more clearly. “We feel that given the complexity of the business, management should put in more effort to lay out as many meaningful factors ahead of time (e.g. timing shift of holiday season), to avoid issues that would cause unnecessary concerns or nervousness about the stock,” he writes. “We still hold the view that Adobe’s business remains strong fundamentally, is in a good seat to monetize AI,” concludes Moerdler. However, he’s somewhat tepid on the shares. “While we like the stock longer term, we think that in the short term there lacks a clear catalyst for the stock.” Other bullish types are also inclined to look past the “moving parts,” but Jackson Ader of KeyBanc, who was cautious back in June, is still concerned. Every one of the company’s explanations for the shortfall is “plausible” except for the Cyber Monday stuff, he writes, which was known in advance. “But sometimes it isn’t about the particulars, it’s about the aggregate,” he writes. “For all the positive momentum that the Company volunteers on product, innovation and operations, we may have a situation this quarter where the list of reasons looks more like a list of excuses.” Ader warns that the company might have to sacrifice profit margin if it’s going to maintain growth. “This has been a key worry for us that many of you are probably tired of hearing,” he writes. “Adobe may have to degrade its margins in order to maintain its revenue growth. “From the looks of the exit velocity of the metrics this quarter, degradation of margin and growth is now in the cards in FY25 unless the Company’s AI features are able to become material, accelerating revenue to offset the increased innovation costs.” Indeed, payoff of artificial intelligence is something that has not been showing up for most software companies as hoped this year, and the decline in Adobe’s stock—it is now down ten percent, year to date—is a sign of investors’ disappointment at that. The burden of proof is on Adobe’s AI in 2025. ANOTHER SHOT IN THE ARM This has been a good week for ARM Holdings, which got a vote of confidence from Morgan Stanley’s Lee Simpson on Wednesday, and on Friday got a new endorsement as Raymond James analysts Srini Pajjuri initiated coverage of the stock with an Outperform rating, and a $160 price target, which would be ten percent above a recent $146.54. Similar to Simpson, his most immediate point is that the company’s version 9 of its CPU design, ARM’s newest design, is going to be boosted by all the AI being done on devices such as Apple’s iPhone 16. “Edge AI is a key catalyst for ARMv9, which offers ~2x royalties over prior generation and has a long runway,” writes Pajjuri. However, it’s noteworthy that Pajjuri is also banking on ARM’s invasion of the server processor market, where Intel and Advanced Micro Devices dominate with their x86 instruction set architecture chips. So far, processors using ARM’s alternative have not stormed the server market. But he sees that changing. “While ARM server adoption has been gradual, GenAI is necessitating low-power CPUs and the upcoming NVIDIA GB200 should drive an acceleration,” writes Pajjuri, referring to “generative AI,” which is, indeed, an energy hog; ARM’s designs are generally regarded as vastly more energy-efficient compared to x86. The “GB200” here refers to Nvidia’s newer parts that combine its “Blackwell” GPUs with Nvidia’s “Grace” CPUs, which are based on ARM’s intellectual property. He notes there is a lot of ARM-b