Why Analysts Are Worried
Growing unease over how artificial intelligence might affect software firms has led an increasing number of Wall Street analysts to advise selling shares of Adobe Inc. and Salesforce Inc. Analysts are concerned that AI-driven tools could erode the software industry's long-term capacity for expansion, pricing flexibility, and profit retention.
Morgan Stanley became the most recent firm to warn of this threat, lowering its ratings on both companies and on several other software stocks.
"Adobe's concurrent freemium, leadership, and reinvestment transitions compound execution risk as the GenAI disruption debate increasingly clouds the path to ARR re-acceleration," said Adam Wood, a Morgan Stanley analyst, referring to annual recurring revenue.
Regarding Salesforce, Morgan Stanley analyst Elizabeth Porter noted that metrics for the company's Agentforce AI offering "have yet to drive an inflection in organic growth as legacy portfolio drags persist."
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The bank also cut ratings on a number of other software firms. Other software companies that received downgrades from Morgan Stanley included Vertex Inc., BlackLine Inc., SPS Commerce Inc., Rapid7 Inc., PagerDuty Inc., Elastic NV, JFrog Ltd., Intuit Inc., and Workday Inc. On the positive side, Morgan Stanley raised Fortinet Inc. to equal-weight, citing "a solid near-term setup" for the cybersecurity firm.
Widespread Downgrades Reflect Broader Pessimism
The wave of downgrades extends beyond just Adobe and Salesforce. Morgan Stanley's actions alone covered nine additional software companies, including Workday, Intuit, and Elastic. This suggests that analysts see generative AI as a structural threat to the entire software industry's business models.
The iShares Expanded Tech-Software Sector ETF, a bellwether for the group, has already fallen 13% this year, and the steep declines in Adobe and Salesforce - both down more than a third - underscore the market's re-evaluation. Historically, software stocks have commanded high multiples due to recurring revenue and pricing power; the current rating downgrades indicate that those advantages may be eroding in the face of AI alternatives that can automate tasks previously requiring expensive software subscriptions.
The broader concern is that generative AI tools - capable of creating images, code, and customer interactions - reduce the need for dedicated software licenses. This threatens the subscription-based revenue models that have long justified premium valuations for companies like Adobe and Salesforce. As these firms invest heavily in their own AI features, analysts worry that the transition could compress margins and slow revenue growth before any payoff materializes.
The Numbers Tell the Story
Adobe shares fell 3.7%, bringing their year-to-date decline to more than 35%. Salesforce's stock slid 1.6% and has lost 36% so far this year.
The recent analyst actions signal a fundamental reassessment of software valuations. For decades, investors rewarded companies like Adobe and Salesforce for their predictable recurring revenue and strong pricing power. Now, the rapid emergence of generative AI - which can produce images, code, and customer interactions - is prompting customers to question the necessity of expensive subscriptions. This shift has already weighed on the iShares Expanded Tech-Software Sector ETF, which is down 13% year-to-date, and suggests that the margin compression and growth slowdown analysts fear may already be materializing.
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