12:17 PM EDT, 03/12/2024 (MT Newswires) -- Adobe Systems' (ADBE) "underperformance" and adjusted AI expectations for fiscal year 2024 are likely to set the bar lower for Q1, Morgan Stanley said in a note emailed Tuesday.

With Adobe shares experiencing a decline of around 10% in the last three months, lagging behind the median large-cap software stock by more than 15%, "investor expectations around Adobe's Gen AI contribution near-term and competitive positioning long-term have been tempered," Morgan Stanley said.

The trajectory of Adobe's digital media net new annualized recurring revenue for fiscal year 2024, the level of competition, and the potential of AI within Document Cloud are crucial factors that will likely influence the direction of Adobe shares moving forward, the note said.

"Heading into Q1 earnings, we see a lower bar after recent underperformance and management walking down revenue contribution expectations for Gen AI and price increase benefits near-term, coupled with commentary on tough comps from the prior period price increase," Morgan Stanley said, adding that these developments raise more questions among investors regarding Adobe's competitive positioning.

While new text-to-image and text-to-video features address competition, "we believe these products are too early and too narrow of solutions," Morgan Stanley said. The company is set to report Q1 financial results on Thursday.

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

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