Adobe's (ADBE) fiscal Q4 digital media net new annualized recurring revenue grew 5%, but fell short of buy-side expectations, raising concerns that weakness in the lower-end market may be offsetting strength in high-end growth, Morgan Stanley said in a note on Thursday.

"Timing differences likely exacerbate the mix of tailwinds and headwinds, as competition at the low-end impacts near-term performance while increased generative AI monetization at the high-end will take time to ramp up," the firm added.

The firm also highlighted that Adobe plans to better monetize its generative AI products like Firefly and Acrobat AI Assistant through tiered pricing models with additional functionality, with a ramp-up expected in 2025. This will be supported by new subscription offerings and increased enterprise adoption.

Despite these challenges, Morgan Stanley noted that user engagement and adoption metrics remain strong, with Acrobat Reader monthly active users growing 25% year-over-year to over 650 million, Firefly surpassing 16 billion generations, and Adobe Express being adopted by 4,000 businesses in Q4.

Morgan Stanley has an overweight rating on Adobe's stock with a price target of $660.

Shares of Adobe were down 12.4% in recent trading.

Price: 481.50, Change: -68.43, Percent Change: -12.44