What Is Adobe’s Fair Value?

by Trefis Team
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ADBE
Adobe
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Adobe (NASDAQ:ADBE) has been a high-growth stock in the last six months since it announced Q3’17 earnings in mid-September. Adobe’s stock price has increased from $155 to $215 since October – a 40% increase. The rally was driven by successive quarters of positive results as well as a robust outlook for FY’18. The trend is expected to continue in the coming quarters, particularly for Digital Experience offerings, according to Adobe’s management.

Going forward, Adobe’s subscription-based revenues are likely to continue to grow rapidly and drive top line growth. Adobe’s management expects net revenues to increase 25% to $2.2 billion in the second quarter. We forecast full year revenues to increase almost 25% for the full year as well. We have summarized our expectations for the company’s FY’18 results on our interactive dashboard platform. You can change expected segment revenue and net margin figures for Adobe to gauge how changes will impact its value.

Digital Media segment includes revenues from Creative Cloud and Adobe Document Cloud. In recent years, Creative Cloud revenues have increased in high double digits, driven by increases in individual, team and enterprise subscriptions. This trend is expected to continue through FY’18 as well. We forecast Creative Cloud revenues to increase 26% to $5.3 billion for the year, due to which total Digital Media segment revenues are expected to be up 22% to $6.2 billion.

Similarly, Digital Marketing revenues have also increased 15-20% annually in recent years driven by strength in the company’s Experience Cloud offerings, which include AEM, Adobe Campaign and Audience Manager. Even in this segment, revenues rose primarily due to the increase in subscriptions. We forecast Digital Marketing revenues to increase 15% through FY’2018 to $2.4 billion. It should be noted that Adobe’s Digital Marketing segment has significantly lower gross margins (~65%) relative to its other segments (~95%).

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