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

Over 30% of Adobe’s (NASDAQ: ADBE) valuation can be attributed to its Marketing Cloud business, according to Trefis estimates. In the first three quarters of 2017, the company generated close to $1.5 billion revenues from Marketing Cloud, on track to achieve our full-year estimate of $2 billion. While Adobe Experience Manager, which encompasses most of the services under the Adobe Marketing Cloud, continues to gain traction, the company 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, 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 the upside to Adobe’s stock price if adoption of marketing services improve.

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Marketing Cloud Can Report Higher Growth Rate In The Coming Years

Over the past few years, Adobe has built a comprehensive Marketing Cloud platform, both through strategic acquisitions and product innovation. Recently, the company has rolled out its unified AI and ML platform Sensei, which supports and supplements its Marketing Platform. The company 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 reach. Most recently, the company has launched the largest cross-media ad campaign to be implemented through a completely automated programmatic platform through the use of AI.

While we currently project that revenues for the Adobe marketing division will grow at a CAGR of around 16.5% to $5.55 billion by 2024, we believe that the scope for online marketing could be even higher as new functionality and capabilities are added to the vertical. 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 $7.3 billion by 2024, and it would present a 12% upside to our price estimate for the company’s stock.

We currently have a $146 price estimate for Adobe, which is 20% below the current market price.

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