Adobe passes over its heir, and the market keeps its doubts

Six months of guessing who would run Adobe ended on September 3rd with the heir losing the crown. David Wadhwani, widely seen inside and outside the company as the natural successor to Shantanu Narayen, was passed over for Anil Chakravarthy, head of the quieter experience (marketing-and-data) unit. Wadhwani is leaving to try his hand at entrepreneurship. And the market's verdict on having the succession question settled so quickly was a drop of roughly 3% in premarket trading. The deflation is the real story: the answer to Adobe's leadership drama was never the question that mattered.

The heir who lost

For years the bet had been on Wadhwani. He ran Adobe's flagship creative business and steered the purchase of Figma, the company's largest deal ever, which once made him look a plausible heir to Narayen's chair. His credentials were inseparable from the franchise that made Adobe famous — Photoshop, Acrobat, the Creative Cloud subscriptions that supply most of its revenue. When the board, after months of deliberation, chose the other man, it was a surprise of the sort that boards deliver when two candidates represent not just two careers but two different answers about where a company's future lies.

Chakravarthy, who takes the top job on December 1st and joins the board, has spent six years building Adobe's customer-experience business, the enterprise data and marketing software that the company now dresses in artificial-intelligence branding such as GenStudio. He is, in the board's framing, a builder of "category-defining products" for an "AI-driven era" in which Narayen steps up to executive chair after 18 years as chief executive.

That choice is itself a thesis. The board did not hand the keys to the man who defends the empire of creativity; it handed them to the man who runs the growth engine that lives outside it. On a market under strain, that reads as a quiet admission that the creative franchise's age of effortless expansion is behind it, and that Adobe's next act must be built somewhere else.

Two halves of a struggling empire

The two businesses sit at opposite ends of the same anxiety. The creative core is precisely the corner of software that generative AI threatens most: the whole commercial logic of charging professionals and amateurs a subscription to make things look weaker when models produce images, layouts and video with a prompt. The experience business, by contrast, is where AI is an opportunity — software that helps firms generate and measure marketing at scale — rather than a threat to the underlying product.

Adobe's own numbers sketch the stakes. In its fiscal second quarter it reported record revenue of $6.62bn, up 13% on a year earlier and ahead of expectations, with earnings per share of $5.96 beating a consensus near $5.82. Annualised recurring revenue rose to $27.1bn. The much-touted AI-first ARR tripled to more than $500m. The trouble is the scale: triple-digit growth off a base that is still roughly 2% of a $27bn recurring-revenue pile whose biggest component is the creative subscription under assault. The optimistic case, in other words, rests on the young data business growing fast enough to offset any erosion of pricing power in the old one — and the numbers have not yet shown that the offset is real.

What the market is really pricing

The instructive detail is that the stock took little comfort from the resolution. Adobe has lost about a quarter of its value in 2024, a further fifth in 2025 and 18% more through September — a decline that began long before any succession drama and has an obvious cause in the market's fear that generative AI will hollow out software incumbents. Even with the leadership question closed by a continuity insider, the day after the announcement Stifel reiterated a Hold with a price target of $200, implying roughly a quarter of downside from where the shares then traded.

That is the tell. If the succession had been the binding constraint, settling it with a known, capable insider should have been a relief rally. Instead the market kept its doubts, because the constraint was never the person in the corner office. It is whether a subscription empire built on human creativity keeps its pricing power in an era when the machines do much of the creating, and whether the quieter data business can repay the board's bet before the creative core gives more ground.

What would move the judgment is evidence, not titles. Chakravarthy's incentives and instincts are bound to the business he ran — a plausible reason to think capital, acquisitions and management attention will tilt there, which is exactly the reallocation the market is unsure it wants. Wadhwani's exit, meanwhile, strips Adobe of the executive most identified with defending the creative strategy, itself a signal of where the company's energy is drifting. The first live test comes as early as September 10th, when Adobe reports its fiscal third quarter with a caretaker finance chief and the search for a permanent CFO still open.

The succession, in short, resolves a question that was never the real one. A change of boss is a plaque on the door, not a change of fortune. Until the AI-first revenue grows large enough to matter against the creative base — or until the creative business shows it can hold its subscriptions against the models — investors are right to treat the new man as a continuation of the problem rather than a solution to it.