HSBC Downgrades Adobe Stock: How AI Disruption Is Changing the Software Industry

Why did HSBC downgrade Adobe?

HSBC analyst Stephen Bersey pointed to reports that ArtCraft (a very small developer) had released free open source versions of a number of Adobe Creative Cloud apps (Photoshop, Illustrator, Premiere and Acrobat). The idea is to provide an alternative that offers the same functionality as the Adobe products, though that's clearly still an aspiration rather than a realised outcome.

The worry is that AI assisted coding will make it easier and cheaper to produce software alternatives. If free tools get good enough to be used for the everyday creative stuff, some individuals and small businesses may well look at paying for the existing products.

HSBC also identified security, legal, maintenance and long-term viability issues in relation to software that's been generated with very limited human oversight. The immediate threat is therefore likely to be with the price sensitive user rather than the professional customer with a complex set of workflows.

What does this mean for the software industry?

The downgrade is a reflection of a wider issue facing software firms: can their existing products, their subscriptions and their customer base survive the threat of AI?

AI provides opportunities for companies like Adobe to increase productivity and deliver new features. It could also lower the barrier to entry, enabling smaller developers to build competing products more rapidly. That in turn could put pressure on pricing, customer retention and future revenue growth.

For the investor the key question is not simply whether AI will replace the existing software but how it could transform business models and sources of competitive advantage.

Adobe are still a major software player but HSBC's move is a clear indicator of the uncertainty around their future. It will be the rate of AI development, the rate of customer uptake and the reliability of the new alternatives that will ultimately shape the competitive landscape.