Death Knell For Adobe Flash As Google’s Chrome Withdraws Support, Though The Impact Will Be Minor

Google (NASDAQ:GOOG) recently withdrew support for Flash based content that includes online ads. ^[1] Ads using Flash will now only open once the viewer clicks on the ad to activate it.  Support for Flash has waned with the emergence of HTML5, due to the former’s high latency and power consumption. It frequently crashes as well.  Apple dropped support some years ago, as has Mozilla with its Firefox. Morevoer, Adobe (NASDAQ:ADBE) has been slow to address these and other flaws, including some of the critical security issues.  It seems likely advertisers will cease to use Flash, especially since HTML5 can now provide better  functionality. Because Adobe charges $19.99 for Flash professional, we believe that this might impact the average sales price of Creative Cloud (CC). In this note, we explore how this will impact Adobe’s stock price.

Check out our complete analysis of Adobe

ARPS for Creative Cloud Might Grow At A Slower Rate

The Creative Cloud (CC) division together with the Adobe’s packaged division makes up 64% of Adobe’s estimated value. One of the key drivers for this division is Average revenue per subscriber (ARPS) for the company, which 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 was $31.74 in 2014. However, it also has standalone Flash professional version that costs $19.99. Since popularity of Flash is waning, we believe that this can impact ARPS over the long term. This leads us to believe that the ARPS can grow at a slower pace in the coming years. If ARPS were to grow to only $33.20 by the end of 2022, then the stock price estimate can be lower by 10%.

Subscription Additions To Continue Grow

The other key driver for this division is the total creative software market. While Creative products (Creative Suite and Creative Cloud) contributed nearly 45% to Adobe’s revenue in 2014, the total number of licensees for Adobe’s Creative products stood at 14.7 million, according to our estimates. In 2014, Adobe added 3.45 million subscribers to its CC services, which translates into a growth rate of 140% over 2013’s 1.43 million. It grew to over 4.35 million by the end of Q2 2105. 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. We estimate that the subscriber base will continue to grow at a robust 74% in 2015 and add over 2.6 million subscribers during the year. However, the company should look to phase out Flash Professional and focus on strengthening other products in the CC portfolio. This could help the company to add 18 million paying subscribers by the end of 2022. This figure represents 66% of the 27 million point and suite licensees, which we estimate will grow at a CAGR of 8.6%.

We currently have a $80.74 price estimate for Adobe, which is in line with the current market price.

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1. Google Chrome will start blocking Adobe Flash ads today, September 1^st 2015 [↩]