Can Increased Adoption Of Creative Cloud Drive Adobe’s Stock Price?

by Trefis Team
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Trefis
ADBE
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Adobe’s (NASDAQ:ADBE) stock has surged by over 77% in 2017 as its Creative Cloud (CC) services have seen robust adoption of late.  The company continues to add services and products to its cloud portfolio. As a result, its Creative Cloud subscriber base and Average Revenue Per Subscriber (ARPS) are growing. Furthermore, the company’s AI engine Sensei has added new capabilities, features, and functionality to its Marketing Cloud solutions. While our price estimate of $145 is now below the current market price following the stock’s rally, we believe that there is upside potential if the company’s CC revenues continue to increase at at a strong rate. In this note, we explore the potential upside to Adobe’s stock due to increased adoption of Creative Cloud.

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Increased Adoption Of Creative Cloud Can Boost Valuation By 30%   

The Creative Cloud (CC) division makes up 54% of Adobe’s value, according to our estimates. The key drivers for this division are the Average Revenue per Subscriber and total Creative Software market. Creative Cloud contributed nearly 57% of Adobe’s revenue in the first nine months of 2017, and we estimate that the total addressable market (TAM) for Adobe’s creative products stood at 21 million users in 2017. We also estimate that the TAM will grow to close to 25 million by the end of our forecast period in 2024. We expect Adobe to end the year with 12 million subscribers for its CC services, which translates into a year-on-year growth rate of 29%. We forecast the subscriber base to continue to grow at a robust CAGR of over 10% through 2024 and add close to 7.7 million subscribers. This figure represents 80% of the 25 million TAM. However, if the TAM were to grow to 33.4 million and CC subscribers to 26.8 million, there would be an upside of nearly 20% to our current price estimate.

The company’s ARPS consists of a blend of subscribers that have enrolled in 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 around $28 in 2016. The recent trend in subscriptions indicates that users are subscribing to de-itemized versions of the CC software of instead of the full version of Creative Cloud. Accordingly, we expect the ARPS to decline slightly in the coming years to $26 by the end of our forecast period. However, the company also reported solid growth in its enterprise term licensing agreements (ETLA), which have a tenure of three years. This should mitigate the decline in ARPS to some extent in the future. The company is also supplementing its creative cloud offering (CC 18) with AI capabilities that are increasing its appeal among creatives. This leads us to believe that the company might be able to price its products at a higher point. If the ARPS were to improve to $33 by 2024, there would be an upside of around 12% to our current price estimate.

 Cumulatively, these two trends could result in an upside of around 30% to our current $146 price estimate for Adobe, which is 20% below the current market price.

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