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Investment Overview for Adobe (NASDAQ:ADBE)
Below are key drivers of Adobe's value that present opportunities for upside or downside to the current Trefis price estimate for Adobe:
Photoshop & Other Creative Software
- Adobe Creative Software Market Share: Adobe's share in the Creative Software market has fluctuated between 40% to 50% and has increased when a new software version has been released. With Creative Suite 6, which was launched in May 2012 we expect an improvement in market share as historically witnessed. For example, Creative Suite 3, which was released around Q1 2007 was successful because of Adobe's acquisition of Macromedia allowing it to add Flash and Dreamweaver for the first time ever. Creative Suite 4, which was released in October 2008 was not as successful due in part to the timing of its launch which coincided with corporate IT budget cuts and reduced advertising spend by enterprises. Creative Suite 5, which was released in May 2010, was a success as it had a few new features like the ability to handle large amounts of data at faster speeds, and new features for designers like the ability to work on 3D objects and videos. We estimate that its market share will continue to be volatile and will depend on the release of new versions with attractive features. We currently estimate its market share to slightly decline to around 41% by the end of Trefis forecast period. There could be an upside of around 10% to our price estimate for Adobe if its market share increases to around 51% by the end of Trefis forecast period. On the other hand, there could be a downside of 10% to our estimate for Adobe if its market share declines to around 33% by the end of Trefis forecast period.
- Total Creative Software Market: We expect the total creative software market to continue to grow from around 6.5 million licenses in 2012 to around 12 million licenses by the end of Trefis forecast period. We believe that proliferation of digital devices like tablets and smartphones will drive the demand in this market. Additionally, as the internet population continues to increase, the demand for Adobe's software will increase as more designers create more websites. The faster adoption of videos will also spur demand of this software. There could be an upside of 10% to our estimate for Adobe stock if the total creative software market increases at a faster rate to reach 9 million. On the other hand, there could be a downside of 8% to our estimate for Adobe stock if the market increases at a slower rate to reach around 6.5 million by the end of Trefis forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for Adobe at the top of the page.
Although Adobe is commonly known for its widely distributed free Acrobat PDF Reader, the company makes money primarily by serving "creative professionals" with software used in image manipulation, animation, web design and the creation of interactive media content. Adobe's Photoshop, Dreamweaver, Flash and InDesign products are some of the better known creative software suites used by graphic designers, production artists, web designers, photographers, animators, publishers and writers.
We believe Photoshop & Other Software is the most valuable segment of Adobe for one main reason:
High Average Prices for Creative Software Products
Although we estimate that Photoshop & Other will sell half the number of software licenses compared to the Acrobat family of software products, we expect that Creative Software products within Photoshop & Other will be priced ~5x higher than the Acrobat products. Our forecast is that the Photoshop & Other division will continue to see increased pricing in the long run.
Growth in Internet Users Drives Demand for Web Design Apps
As the Internet user population increases, the demand for creative software will also increase as more web designers create rich Internet sites using programs such as Adobe's Dreamweaver and Flash. We expect the Internet penetration in the US to increase from about 75% presently to 85% by 2015.
Growth in Casual Design Software Users Will Drive Demand for Creative Cloud
Creative Cloud will be priced as a subscription based service and will cost about $600 a year ($49.99 monthly). This subscription will allow users to access all the features available in the full version of the Creative Studio 6 which is priced at $2,500. We expect this to drive revenues from casual users and could potentially reduce loss of revenue due to piracy. With the software also being customized for use in tablets, we expect the tablet market to drive subscriptions in the near term. This is likely to be the biggest driver in the future, if the subscription model takes off. In our model, we estimate that 2.7 million licenses for the creative software will sell in 2012. A new version of the Creative Suite is released every two years, a subscription model works out to be half the rate of buying every new release. This is bound to encourage more users to adopt it and we can expect a spike in the number of users. The real advantage is for Adobe as it can exercise better control over software maintenance and updates, improving customer service. There is however a chance that revenues will suffer in the short term if the cloud offering is comparable to the stand alone software. If a significant portion of the users switch to the subscription service, there is a potential for revenues to fall by as much as $650 per user per year. This is assuming a full license fee of $2,500 for each two year release and subscription fee of $600 a year. We expect margins to be higher on the cloud based model.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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