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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:
- Adobe Creative Subscriber base : Adobe launched the cloud version of its flagship software Creative in 2012. Since then, the adoption of cloud services has been robust. At present, Adobe has an installed base of close to 12.8 million users for its Creative software and packaged software such as Photoshop etc. Its adressable market in 2016 was over 20 million, according to our estimates. Each of this user is a potential Cloud service subscriber. In the past year, the creative cloud subscription has swelled to over 9 million users. At this rate of adoption, we estimate that the company will be able to add close to 12 million subscribers in 2017 and 18.9 million subscribers by 2023. There could be an upside of around 10% to our price estimate for Adobe if its subscription were to improve to 20 million 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 CC adoption were to stall to 10 million by the end of Trefis forecast period.
- Average Revenue Per Subscriber : Adobe's CC service price range from $74.99 for the complete service to $ 9.99 for the standalone Creative Photoshop service. As users adopt de-itemized CC service, we expect the blend of ARPU to decrease. We expect the figure to always remain below the highest sticker price as revenues in a year are a blend of the fee for full CC and standalone services from net new subscribers that are acquired throughout the year.
- Marketing software revenue:Over the past few years, Adobe has built a comprehensive digital marketing platform that addresses most of the needs of digital marketers. The company has scaled up the functionality and product offering of its marketing platform, through organic and inorganic growth. It has grown from $57 million in 2009 to $1.63 billion in 2016. The company has projected that revenue for this division will grow at a CAGR of 25% in the next couple of years. Currently, we project that the revenue will grow to $4.95 billion by 2023.There could be an upside of around 10% to our price estimate for Adobe if its revenues were to improve to $6 billion by the end of Trefis forecast period. On the other hand, there could be a downside of 10% to our estimate for Adobe if revenues were to increase slowly to $3 billion 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 Creative Cloud (CC) is the most valuable segment of Adobe for one main reason:
High Average Prices for Creative cloud services over the period of use
Creative Cloud is priced as a subscription based service and costs about $900 a year ($74.99 monthly)at the highest price band. 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 the loss of revenue due to piracy. As the software can also be used for tablets, we expect the tablet market to drive subscriptions in the near term. This is likely to be the biggest driver in the future. Over 9 million subscribed for the creative cloud in 2016. More are expected to subscribe over the course of next few years as the company has done away with the perpetual licensing model for its Creative products. The expected spike in the number of CC users going forward should help the company to bolster its revenues. The real advantage is for Adobe as it can exercise better control over software maintenance and updates, improving customer service.
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. Furthermore, with the advent of smartphones with powerful cameras, hobbyists are using sophisticated apps from companies such as Adobe to improve their pictures. We expect that this will bode well for Adobe in the future.
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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