Adobe’s Marketing Cloud To Drive Long-Term Revenues
Over 28% of Adobe’s (NASDAQ: ADBE) valuation can be attributed to its Marketing Cloud business, according to Trefis estimates. In 2016, the company generated over $1.6 billion revenues from Marketing Cloud. This trend continued in 2017, as the company generated nearly $480 million in revenues in the first quarter of the fiscal year, largely on track to achieve our full year estimate of $2 billion. This growth has been largely driven by more expansive and innovative product offerings from the company, as it has added Machine Learning (ML) and Artificial Intelligence (AI) capabilities to its marketing platform through the introduction of its Sensei platform. Considering the rapid adoption of Adobe’s Marketing Cloud, as well as acquisitions the company has made, we believe that the segment’s revenue should continue to see strong growth in the coming years. On the other hand, competition from players such as Salesforce and SAP is intensifying and could eat into Adobe’s market position. In this note, we explore our base case scenario for Adobe, as well as upside and downside scenarios for the business.
Check out our complete analysis of Adobe
Marketing Cloud Set To Report Robust Growth In The Coming Years
Over the past few years, Adobe has built a comprehensive Marketing Cloud platform, both through strategic acquisitions and product innovation. In addition to traditional capabilities in digital marketing, the company also has rolled out digital marketing and advertising services for Over The Top (OTT) video TV content through its Primetime services. Currently, Adobe offers nine products under its marketing cloud solution: Adobe Analytics, Adobe Target, Adobe Social, Adobe Media Optimizer, Adobe Experience Manager, Adobe Campaign, Adobe Audience Manager, Adobe Primetime and the TubeMogul advertising platform.
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Recently, the company has rolled out its unified AI and ML platform Sensei, which supports and supplements its Marketing Platform. Adobe is aiming to increase its revenues from cloud-based marketing solutions by expanding in new geographies and verticals. It has also formed partnerships with other platforms such as Microsoft’s Azure to extend its customer base. In the past, the company has stated that the marketing cloud is easily a $10 billion opportunity. However, considering strong industry tailwinds, we believe that the scope for online marketing could be even higher. We currently project that revenues for the Adobe marketing division will grow at a CAGR of around 17% to $4.95 billion by 2023.
Revenues From Marketing Cloud Can Be Significantly Higher
Adobe has been working diligently to improve its footprint in the Marketing Cloud space. It is focusing on four key market opportunities: Personalization, Content, Advertising, and Data & Analytics. While in the past, it has relied on acquisitions to grow its revenues and footprint, recently it has been adding capabilities to its digital marketing portfolio. The Sensei platform, coupled with the market opportunity for digital marketing, could potentially allow the company to achieve a CAGR of 20% in Marketing Cloud revenues instead of the currently projected 17%. If this were to materialize, the division’s revenues could increase to $6 billion by 2023, and it would present a 10% upside to our price estimate for the company’s stock.
Competition Is Intensifying
The Marketing Cloud space is highly fragmented, and vendors are constantly looking to innovate in order to defend or grow their market share. In recent quarters, competing players such as Microsoft, IBM and SAP have improved their position in the market by leveraging existing partnerships, acquiring new companies and offering their solutions as Platform-as-a-Service (PaaS). While Adobe is close to a true PaaS marketing tool, competition is likely to catch up to it. Therefore, it is possible that revenues from its Marketing Cloud division could grow at a slower rate, only reaching $3 billion by the end of our forecast period. This would result in a 7% downside to the company’s estimated valuation.
We currently have a $132 price estimate for Adobe, which is in line with the current market price.
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