Every fast‑growing consumer platform pursues a similar strategy. Acquire enough free users first, then figure out how to monetize them later. Adobe achieved that on September 10, 2026, when its fiscal third‑quarter results revealed a total user base surpassing one billion for the first time in the company’s history. Wall Street, however, responded with indifference rather than celebration.
Morgan Stanley’s analyst Adam Wood kept an Underweight rating and a $240 price target, unchanged from the assessment made two months earlier. That target remains roughly 5% below the stock’s recent close, underscoring investors’ lingering doubts about Adobe’s growth prospects.
Behind the Billion‑User Milestone
Revenue came in at $6.76 billion, up 13% year‑over‑year, according to Adobe’s filing. Non‑GAAP earnings per share rose to $6.13, a 15% increase, while annualized recurring revenue reached $27.5 billion. Creative freemium offerings such as Firefly and Express attracted more than 100 million users, a 70% increase from the prior year, per The Wall Street Journal.
The combination of record revenue and rapid user expansion fulfills the bullish case that has underpinned Adobe’s freemium pivot. Shares closed at $252.23, up 1.37% on the day, after earlier dipping to $241.51. While the stock remains well below its 52‑week high of $370.86, it sits comfortably above its 52‑week low of $190.12.
Why Morgan Stanley Isn’t Yet Convinced
The issue lies not in what Adobe reported but in what remains unchanged. Full‑year guidance for annualized recurring revenue growth stayed at 10.2%, and operating‑margin guidance remained at 45%. Meanwhile, remaining performance obligations grew only 8% year over year, down from the 12%‑13% range earlier in the year—a slowdown that Morgan Stanley cites as a fresh caution point.
Meeting the full‑year target now requires roughly $775 million of net new annualized recurring revenue in the fourth quarter, nearly double the third‑quarter total, which itself fell 38% from a year ago, according to Morgan Stanley’s calculations.
Morgan Stanley first downgraded Adobe to Underweight in July, citing concerns about freemium conversion rates and leadership uncertainty. Two months and one record‑breaking quarter later, the firm’s outlook has not shifted enough to alter its rating.
A New CEO Inherits an Unfinished Bet
On September 3, Adobe announced that Anil Chakravarthy will become president and CEO on December 1, succeeding Shantanu Narayen, who will transition to executive chair. Narayen has led the company since 2007, and the handover comes just a week before what many view as Adobe’s most critical strategic challenge in years.
Reuters reported that Adobe faces intensifying competition from AI‑native rivals eroding its design‑software dominance—a landscape Chakravarthy will inherit from day one. Morgan Stanley highlighted three converging factors: the leadership change, an interim finance chief, and an unproven monetization strategy.
The broader financial picture:
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A $300 price target and Outperform rating came from CLSA a day before Morgan Stanley’s original downgrade in July, widening the split among analysts.
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Adobe repurchased about 9.5 million shares during the quarter, a pace that remained unchanged despite executives touting the long‑term payoff of the freemium strategy.
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Fourth‑quarter revenue guidance of $6.8 billion to $6.85 billion left investors wanting more, per Investing.com, keeping pressure on the stock amid the CEO transition.
The Freemium Bet Is Bigger Than One Stock
Adobe is not alone in believing that scale now outweighs immediate revenue. Across enterprise software, firms confronting cheaper AI‑native tools are absorbing the cost of free users today in anticipation of a larger paying base tomorrow.
What sets Adobe apart is the sheer size of its freemium base—more users than the population of most countries—built on two decades of subscription success.
The real test will come when Adobe’s net new annualized recurring revenue stops declining and begins confirming that a billion users can eventually be monetized. That moment will not be reflected in Chakravarthy’s first earnings call in December.
Until then, Wall Street is likely to continue judging Adobe on the metric it has yet to master, rather than the one it has already achieved.
