Adobe’s Upside and Downside Market Share Scenarios
Adobe (NASDAQ:ADBE) is famous for developing software tools used for the purpose of website designing, video editing, print layouts and digital publishing. Adobe’s Creative Suite of software is used by creative professionals such as graphic designers, photographers as well as hobbyists to create visually rich print and online content. Such content includes photographs, videos, animations and mobile content. Adobe is the largest player in the creative software market and has around 46% market share. It competes mainly with Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Quark and Corel in this market.
Here we explore upside and downside scenarios for Adobe’s Creative software business, which accounts for around 55% of the $37.43 Trefis price estimate for Adobe stock. Our Adobe price estimate currently stands about 5% above market price.
10% Downside – Risk of Adobe’s Market Share Decline
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Adobe sells some of the popular software such as Photoshop, Dreamweaver, Flash Professional and InDesign, which has placed Adobe in a dominant position in the creative software market. Historically, Adobe’s share in the creative software market has fluctuated between 40% to 50%, and has historically increased when a new software version has been released.
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See our full analysis and $37.43 price estimate for Adobe
Creative Suite 3 (CS 3), which was released around Q1 2007, was successful because of the Adobe’s acquisition of Macromedia that allowed it to add Flash and Dreamweaver for the first time ever. CS 5, which was released in May 2010, was again a success as it had a few new features like the ability to handle large amounts of data at faster speeds and added new features for designers such as the ability to work on 3D objects and videos. Going forward, we estimate that Adobe’s market share will continue to increase as and when a new software version is released and then decline when the initial uptake for the new software version has died down.
However, Adobe will need to continue to bring compelling features for every new version of its Creative suite to justify the uptick in its market share. This presents a risk to its market. Adobe has lost market share in the past such as its loss in market share following the release of CS 4. Its market share declined from 48% in 2008 to 43% in 2009 despite the release of CS 4 in October 2008, since it lacked compelling features for the users to upgrade their software.
In the scenario where its market share declines to 36% by the end of Trefis forecast period, there could be a downside of 10% to our estimate for Adobe stock.
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10% Upside – Total Creative Software Market Increases at a Faster Rate
We believe that the driving factors behind the growth of Creative software market are many. This includes:
- The proliferation of digital devices like tablets, smartphones, camcorders, gaming consoles, etc.
- Increasing availability of broadband, especially in emerging markets
- Growth in the number of Internet users
- An increase in online advertising spending
- Faster adoption of video usage
We estimate that the total market in terms of number of software licenses sold will continue to grow from 5.7 million in 2010 to 7.6 million by the end of Trefis forecast period, at an average annual growth rate of around 4%.
However, if the market increases at a faster annual growth rate of 7% for the total market to reach 9 million by the end of Trefis forecast period, there could be an upside of 10% to our estimate for Adobe stock.