Why Adobe Is Worth $104 Per Share

Adobe (NASDAQ:ADBE) successfully transformed its business model from being a perpetual licensing vendor to a cloud-based Software-as-a-Service (SaaS) provider over the past few years. As this transformation gained momentum, the number of subscribers for its Creative Cloud (CC) grew, while Average Revenue Per Subscriber (ARPS) declined, due to the introduction of the de-itemized suite.

In the latest move, the company at its annual MAX conference for users introduced Sensei, its new artificial intelligence and machine learning framework.  Sensi is a unified AI platform that will help users navigate across its Creative Cloud (CC), marketing and document cloud services.  In its current form, AI will power Adobe’s search by image feature in Photoshop.

Trefis believes that launch of new features and functionality across its vertical can help the company to improve its creative cloud subscriber base and revenue from marketing cloud. In this note, we explore various verticals of Adobe.

Check out our complete analysis of Adobe

Creative Cloud – The Cash Cow For The Company

The Creative Cloud (CC) division makes up 49% of Adobe’s estimated value. The key drivers for this division are the average revenue per subscriber and total creative software market. While Creative Cloud contributed nearly 53% to Adobe’s revenue in first nine months of 2016, the total addressable base for Adobe’s creative products stood at 25 million, according to our estimates. In 2016, we expect Adobe to exit with 9 million subscribers for its CC services, which translates into a growth rate of 46% over 2015’s 6.17 million. We estimate that the subscriber base will continue to grow at a robust 9.3% till the end of the forecast period in 2023 and add over 6.5 million subscribers. This figure represents 62% of the 25.8 million of TAM.

Average revenue per subscriber (ARPS) for the company consists of a blend of subscribers that have enrolled into 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 $29.28 in 2015. The recent trend in subscriptions indicates that users are subscribing to de-itemized versions of the software of CC instead of the  full version of Creative Cloud. This leads us to believe that the ARPS will decrease in the coming years to $26 by the end of our forecast period. However, the company also reported good growth in its enterprise term licensing agreements (ETLA), which have tenure of three years. This should mitigate the decline in ARPS to some extent in the future.

Adding Features To Adobe Marketing

Adobe’s cloud marketing division is the second biggest division and makes up 27% 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. The Adobe marketing cloud includes a complete set of analytics, social media optimization, consumer targeting, web experience management and cross-channel campaign management solutions. It generated around $1.16 billion in the first nine months of 2016 and is on course to generate $1.6 billion annual revenues in 2016.

Having been built from the acquisition, the business has had a compounded annual growth rate (CAGR) of 28% over last five years. Well positioned in a growing market, this division is expected to witness robust growth in the coming years. Adobe is aiming to increase its revenues from cloud-based marketing solutions by expanding in new geographies and verticals. Recently it has acquired TubeMogul, which should further strengthen its foothold in the digital marketing industry. According to the company, the marketing cloud is easily a $10 billion opportunity. Currently, we project revenues from its digital marketing division to reach $3.1 billion by the end of our forecast period.

Acrobat Cloud To Boost Document Services Revenue

Acrobat family is the third largest division and makes up 16% of Adobe’s estimated value. In the past few quarters, revenues from this division have been on a decline, primarily due to increase in revenue from document cloud services that have subscription fee spread over the period of usage. The company has amassed over 3.37 million subscribers for document cloud service. We expect this trend to continue and forecast the subscriber base to grow to 11 million by the end of our forecast period. Furthermore, as this service gains momentum, we expect the ARPS to increase from $8.47 in 2015 to $14.15 by the end of our forecast period. Despite this growth rate, we expect revenue to grow to $1.88 billion by 2023.

We currently have a $104 price estimate for Adobe, which is in line with the current market price.

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