By Mackenzie Tatananni

Adobe could lose ground as rivals like OpenAI establish themselves in the market for creative artificial intelligence, UBS analysts said on Friday.

Analysts led by Karl Keirstead lowered their target for the stock price to $475 from $525 while maintaining a Neutral rating on the shares.

Shares of Adobe slipped 3%, putting the stock on track for its lowest close since June 7, 2023, according to Dow Jones Market Data. As of Friday morning, the stock was the worst performer in the S&P 500 and Nasdaq 100.

Adobe has increasingly embraced AI, rolling out its Firefly suite and incorporating generative AI tools into its flagship photo-editing software. However, UBS said early leaders like OpenAI, Runway, and Midjourney may outpace Adobe in the battle for a market the bank described as "fiercely competitive."

The analysts used Coca-Cola's 2024 holiday commercial, which was created using AI, as a case study for the acceptance of AI-generated content.

They noted that Adobe played no role in creating the advertisement, which was instead made by competitors OpenAI, Runway, and Leonardo, which is owned by Canva. While Coca-Cola and Toys 'R' Us, which made an AI-generated ad in June, used Adobe's core creative suite for final editing and postproduction work, there was no incremental spending, the analysts wrote.

In addition to the intense competition, UBS noted the legal hurdles impeding the spread of AI-generated content. Generative AI typically trains on large amounts of data scrubbed from the internet, which has sparked concerns over copyright violations.

The analysts said Adobe has told investors that as a result, brands have been cautious about using AI-generated content in marketing campaigns, presenting itself as "the only commercially safe offering."

Adobe Firefly is trained on the company's library of stock content as well as openly licensed content and public domain content with expired copyright, all of which Adobe characterizes as "clean data."

Since Adobe reported fourth-quarter earnings last month, the stock is has fallen 19% to trade at 21 times the free cash flow the company is expected to generate in fiscal 2025, the analysts said. While that leaves the stock at the bottom of the range of valuations among its peers, "the AI narrative could get worse before it gets better," the analysts wrote.

Still, the analysts said they "don't mind staying patient on the stock" despite the lack of clarity over Adobe's prospects, they said.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com

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January 03, 2025 11:35 ET (16:35 GMT)

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