Adobe Inc (ADBE US): Downgrade to Hold: Free knockoff creates headline risks

HSBC downgrades Adobe (ADBE.US) to Hold from Buy and cuts its target price to USD267 (from USD310). We note media reports that ArtCraft (apparently a firm of just a few people) has released a free open-source "auto-coded" clone of Adobe's Creative Cloud suite, including versions of Photoshop, Illustrator, Premiere, Lightroom, Acrobat, After Effects and InDesign, and hopes to reach "100% feature parity" within a month. The news creates headline risks for Adobe. We cut our revenue estimates by about 1% and our non-GAAP EPS estimates by 1-2% to reflect risks that some amateur retail users may migrate out of Adobe. Adobe trades at 9.0x CY27e non-GAAP PE vs the sector median of 20.7x; we think the discount is warranted as Adobe is a realistic candidate for AI-led disruption. We value Adobe on a target PE of 10.5x (a discount to the 5-year average of 23x; was 12x) and next-12-month non-GAAP EPS of USD25.47 (was USD25.80). Our TP implies 10.2% upside.