We have upgraded our price estimate for Adobe (NASDAQ:ADBE) from $51 to $58 based on the strong adoption of its cloud offering across its Creative, Marketing and Acrobat divisions. We expect the growth momentum for its cloud offering to continue to drive the company’s revenues in the near future. We have also increased the growth rate of Adobe’s marketing cloud division, which has witnessed good growth due to strong presence and brand recognition across the globe. Despite the price revision, our stock price estimate is 19% below the current market price. In this article, we will discuss the drivers for our new price estimate.
Drivers For Price Revision
Creative Cloud To Drive Growth
Subscription At Creative Cloud To Grow: According to our estimate, the Creative Cloud (CC) division is the biggest of Adobe’s operating segment and makes up approximately 57% of the company’s value. In May this year, the company moved away from Creative Suite (CS) entirely to focus its efforts on developing Creative Cloud (CC). This resulted in robust adoption of CC subscription. While the company has added 2.308 million subscribers to its CC service, we expect rapid adoption of this service to continue in the near term. We now estimate that the company is well underway to add over 3.4 million subscribers in 2014, and on track to add 10.8 million subscribers by the end of 2020. This figure represents 80% of the current 12.8 million point and suite licensees. As a result of this revision, our stock price estimate has increased by $6. However, if subscription were to grow at a slower rate to 7.5 million, our stock price estimate can decline by 15%.
Average Revenue Per Subscriber To Grow: Average revenue per subscriber (ARPS) for the company consists of a blend of subscribers that have enrolled to different levels of cloud services. While access to the complete Creative Cloud suite costs $74.99 per month, access to standalone Photoshop is priced at $9.99 per month. We estimate that the blended ARPS for the company were $27 in 2013. The recent trend in subscriptions indicates that users are subscribing to the annual full version of Creative Cloud. The company has also reported good growth in its enterprise term licensing agreement (ETLA), which have tenure of three years, during the second quarter earnings announcement. This leads us to believe that the ARPS will increase in the coming years as it converges to the list price of $74.99. We estimate that the ARPS will grow to $51 by 2020. However, if ARPS were to grow at a slower rate of $40 per month, our stock price estimate can decline by 10%.
Adobe Marketing Cloud
Revenues From Marketing Cloud To Grow: Adobe’s cloud marketing division is the second biggest division and makes up 20% of its value. Over the past few years, Adobe has built a comprehensive digital marketing platform that addresses most of the needs in digital marketing. This build up started in 2009 with the acquisition of Ominiture. Since then, the company has scaled up the functionality and product offering of its marketing platform through organic and inorganic growth. For example, the company acquired Neolane to boost its market share in digital marketing.  Adobe’s digital marketing platform currently leads the race to become the enterprise digital marketing platform provider of choice for professional marketers.
We believe this platform provides a cost-effective digital marketing solution for companies that can manage marketing campaigns across different channels and devices. Adobe is aiming to increase its revenues from cloud based marketing solutions by expanding in new geographies and verticals.  The company is targeting a compounded annual growth rate of 25% by 2016. Considering the trend in revenue growth over the last two quarters, we expect the company to report a revenue growth rate in excess of 24% for the 2014-2016 period. Currently, we project revenues from its digital marketing division to reach at least $3.4 billion by 2020. As a result, our stock price estimate has increased by $1.20 post the revision of our model. However, if the revenues grew to $4 billion by the end of our forecast period there can be 10% upside to our price estimate.
Acrobat Family Division
Acrobat Family Revenues To Recover: Acrobat family is the third largest division and makes up 10% of Adobe’s estimated value. In the past few quarters, revenues from this division have been on a decline, primarily due to launch of document cloud services that have subscription fee spread over the period of usage. The company has amassed over 1.9 million subscribers for document cloud service. We expect this trend to continue, and forecast the subscriber base to grow to 8 million by the end of our forecast period. Furthermore, as this service gains momentum, we expect the ARPS to increase from $5.91 to $10.00 by the end of our forecast period. However, if subscriber base were to grow at a slow rate to 3.5 million and ARPS were to remain flat, there can be a 5% downside to our price estimate.
Transition To Cloud Services To Negatively Impact Smaller Divisions
The smaller divisions of Adobe, which include Adobe packaged software, LiveCyle software and Print & Publishing, makeup 6% of its estimated value. The adoption of Creative Cloud will negatively impact Adobe’s packaged software, while up-selling to Adobe marketing cloud will cause LiveCyle & Connect Pro revenues to decrease. We expect revenues from these divisions to decline in the future. We estimate that average selling price of packaged software and LiveCycle software to decline in the future to $200 and$ 85.20, respectively. We also expect the number of licenses sold for both the divisions to decline. Even if these metrics were to improve for both the division, it will have little impact on our stock price valuation, since contribution from these divisions is small.
We have revised our stock price estimate to $58.14.
- Read Adobe’s Neolane Acquisition Will Boost Its Digital Marketing Division [↩]
- To read more about our view on Adobe’s digital marketing division, see here [↩]