Adobe’s Creative Suite 5 Lifts Stock But Pricing on Future Versions a Concern
Adobe (NASDAQ:ADBE) maintains a dominant position in the creative software market, with its leading photo editing, publishing and web design products like Photoshop, Dreamweaver, Flash Professional and InDesign. It competes mainly with Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Quark and Corel in the creative software market. Historically, Adobe’s market share has fluctuated in the range of 45%-50%, and its share has risen with the releases of new software versions.
However, Adobe’s market share dropped by 5 percentage points from 2008 to 2009 in spite of the release of Creative Suite 4 (CS4) in October 2008. The reason for the decline is attributable to IT budget cuts implemented by corporates, reduced ad spending by enterprises, and the absence of significant new features in CS4. Adobe’s 2010 revenues have improved with the release of CS5 with upgraded features and at faster speeds. We expect Adobe’s share will continue to be volatile in the coming and will end up declining to around 45% by the end of Trefis forecast period. Trefis members predict the share will reach closer to 54%, implying an upside of 11% to our price estimate for Adobe’s stock.
We currently have a Trefis price estimate of $37.43 for Adobe’s stock, ahead of the current market price of $34.
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Sales Growth Volatile, Depends on New Version Release
Traditionally, the market has seen high volume sales growth whenever a new version of Creative Suite is launched. Generally there is a gap of around 18 months between the release of new versions. In 2010, Adobe largely made up for its market share loss a year earlier with the launch of CS5. Many CS3 users skipped upgrading to CS4, making CS5 an important release for Adobe. Creative Suite revenues increased from $432 million in Q1 2010 to $533 million in Q2 2010 after version 5 release. As a comparison, the revenues for CS5 exceeded that of CS4 by 15% during the first five weeks of product launch.
We believe introduction of newer versions at regular time periods will keep Adobe’s creative software share elevated in the coming years. Besides, it should benefit from the growing creative software market, which we estimate will increase at a rate of 4% annually in the coming years. (See Adobe’s Upside and Downside Market Share Scenarios)
Higher Pricing Could Weigh on Adobe’s Share
Adobe has continuously increased the prices of its Creative Suite products, which has limited its market share growth and may continue to do so. The average price of Adobe’s creative software products has increased at an estimated $384 in 2005 to $787 in 2010, and we expect the price to cross $1,100 by the end of our forecast period.
Trefis Community Forecast
Trefis members forecast Adobe’s creative software market share will increase from near 52% in 2011 to 54% by the end of the Trefis forecast period, compared to the flat baseline Trefis estimate of 45% over the same period. The member estimates imply an upside of 11% to the Trefis price estimate for Adobe’s stock.