This week, Adobe (ADBE.US) held its annual conference, gathering thousands of marketers, filmmakers, and content creators to demonstrate how its software products are actively embracing artificial intelligence (AI) technology while remaining the go-to tools for creative work. However, the strongest skepticism about whether generative AI will disrupt the business model of this creative software giant comes not from users but from investors.

Despite Adobe’s clear strategic positioning, Citi analyst Tyler Radke noted that the company faces "structural competition and pricing pressure risks driven by AI." As AI tools like Google’s (GOOGL.US) Veo video-generation model rapidly gain traction, Adobe’s stock has fallen by about a quarter this year. CEO Shantanu Narayen recently stated in an interview that Adobe is severely undervalued due to excessive market focus on semiconductors and AI model training.

Adobe’s stock decline is not an isolated case—other leading enterprise software firms like Salesforce (CRM.US) and Workday (WDAY.US) have seen similar trends. Investors across the sector worry that the real-world adoption of AI tools is lagging behind initial expectations. However, unlike other industries, Adobe’s core media creation market is being rapidly reshaped by AI. While its AI-powered features in apps like Photoshop have been used billions of times, many of today’s most popular AI tools come from competitors.

Radke pointed out that videos seen on social media may now be created using OpenAI’s Sora, while party invitations are likely designed with Canva templates—highlighting a growing trend where average users can produce media content without relying on professional tools like Adobe’s.

To retain AI-savvy creators, Adobe announced several initiatives at its Los Angeles conference, the most strategic being the integration of third-party AI models (including those from rivals like Google and OpenAI) into core tools like Photoshop. This shift positions Adobe partly as an AI model distributor—procuring third-party models to serve its customers—and marks a significant adjustment in its AI strategy.

Historically, Adobe promoted its proprietary Firefly AI model, emphasizing its ability to mitigate copyright risks and inappropriate content while arguing that customers would prefer it over third-party models for security reasons. However, Ely Greenfield, Adobe’s Creative Product Technology Director, acknowledged that people now widely accept that AI models require vast data training. He noted that clients primarily use Firefly for finalized content while leveraging third-party models during brainstorming.

KeyBanc analyst Jackson Ader observed positive feedback from conference attendees about Adobe’s integration of third-party AI models, stating, "We approve of this strategy, as we previously doubted Adobe’s ability to compete in AI-driven image and video generation."

Currently, AI-centric products generate over $250 million in annual revenue for Adobe. However, the company argues this figure underrepresents AI’s broader impact, introducing a more flexible "AI-driven revenue" metric—estimated at roughly $5 billion annually through pricing adjustments and reduced customer churn.

Evercore ISI analyst Kirk Materne noted that while Adobe’s short-term stock performance remains debated, this year’s conference was a "critical step toward addressing market concerns over whether generative AI poses an existential threat."