Revising Our Price Estimate For Adobe To $178

by Trefis Team
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Adobe (NASDAQ:ADBE) has successfully transformed its business model over the past few years, from a perpetual licensing vendor to a cloud-based Software-as-a-Service (SaaS) provider. As this transformation gained momentum, the number of subscribers for its Creative Cloud (CC) has grown to a record high, while its Average Revenue Per Subscriber (ARPS) has also grown as the company continues to add new value-added features and functionality.

Based on the company’s guidance for 2018, we have revised our price estimate for the stock from $145 to $178, which is slightly ahead of the current market price. The 23% upward revision in our price estimate was driven by the widespread adoption of Creative Cloud and the migration of Creative suite users to CC in addition to sequential growth in ARPS. Furthermore, based on the company’s guidance, we have revised the revenue growth rate for the Adobe Experience Cloud division to 20% in 2018 and a CAGR of 15% through the end of our forecast period. The improvement in margins in 2017 has also prompted us to revise our gross margin estimates upwards by about 100 basis points across verticals. Cumulatively, this has resulted in $33 per share, or $15.5 billion, increase in our valuation for the company.

We expect that the launch of new features and functionality across verticals should help the company continue to improve its Creative Cloud subscriber base and revenue from Experience Cloud. Below we discuss our forecasts for Adobee

Check out our complete analysis of Adobe

Creative Cloud Will Continue To Grow In The Coming Years

The Creative Cloud (CC) division makes up 57% of Adobe’s value, per our estimates. The revenues grew for this division grew by 33% in 2017 to $4.17 billion. According to the latest earnings, the company continues to add a record number of subscribers to the business, while boosting its average revenue per user. Considering these trends, we estimate that the revenues for Creative Cloud will grow at a CAGR of 6.5% to $6.5 billion by 2024. This represents a significant share of Creative Cloud’s total addressable market (TAM), which is expected to grow to $24 billion by 2020.

Furthermore, the gross margins for this division have improved by 110 basis points in 2017 as the company added value-added services to its CC portfolio. We expect that the company will be able to maintain healthy margins in the coming years.

Adding Features To Adobe Experience Cloud

Adobe’s Experience Cloud division is the company’s second largest division and makes up 26% of its value, according to our estimates. Over the past few years, Adobe has built a comprehensive digital marketing platform, scaling up the functionality and product offerings of the platform through organic and inorganic growth. Including inorganic growth, the business has seen a compounded annual growth rate (CAGR) of 28% over the 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. According to the company, the Experience Cloud – which includes marketing, analytics, and advertising – is easily a $53 billion market opportunity. We now project revenues from the company’s Experience Cloud segment to reach over $5 billion by the end of our forecast period.  

Acrobat Cloud To Boost Document Services Revenue

The Acrobat family is Adobe’s third largest division and makes up around 11% of its value, per our estimates. In the past few years, revenues from this division have been on a decline, primarily due to growth in revenue from Document Cloud services that have subscription fees spread over the period of usage. However, revenues grew to $837 million in 2017 as the number of subscribers for Document Cloud services grew. We expect this trend to continue and forecast revenue to exceed $1 billion in the coming years.

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