Adobe’s Focus On A Data-Driven Business Model Is Likely To Sustain Growth Momentum

by Trefis Team
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Adobe (NASDAQ:ADBE) reported its fiscal Q2 2019 earnings on Tuesday, June 18. The company beat consensus expectations on revenue and earnings, and noted that its data-driven operating model philosophy has been driving growth across segments. In addition to generating synergies from the integration of Magento and Marketo in its digital experience business, Adobe has been expanding its total addressable market thanks to its focus on creativity, document and customer experience management categories.

Based on the analysis presented, Trefis has raised the fair value estimate for Adobe’s share to $325, which is roughly 10% above the current market price. Our interactive dashboard, How Did Adobe Fare In Fiscal Q2 2019, And What’s The Outlook For The Full Year? outlines our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on the company’s valuation. Additionally, you can see more Trefis technology company data here.

A Quick Look At Adobe’s Revenue Sources

Adobe makes money by selling software for creative content and marketing purposes, with a focus on user experience. The company’s products are offered as subscription and through licenses. Adobe has three segments:

  • Digital Media (2018 revenue of $6.3 billion, 70% of total revenue): Segment revenue is derived from the sale of subscriptions to Creative Cloud (Photoshop, Illustrator, Premiere Pro, Lightroom CC, InDesign, Adobe XD etc) and Document Cloud (Adobe Acrobat, Adobe Sign and Adobe Scan).
  • Digital Experience (2018 revenue of $2.4 billion, 27% of total revenue): Segment revenue is derived from the sale of subscriptions to Adobe Experience Cloud, a cross-channel marketing optimization tool that includes analytics, targeting, campaign management, content delivery and commerce enablement.
  • Publishing (2018 revenue of $0.3 billion, 3% of total revenue): Segment revenue is derived from the sale of licenses to legacy products such as eLearning, technical document publishing, web conferencing etc to OEMs.

Total revenues have grown by $3.2 billion over 2016-18 at a CAGR of 24.2%. 2018 revenue grew to $9 billion (23.7% y-o-y). Q1 revenue had increased to $2.6 billion (25.1% y-o-y). Q2 revenues grew to $2.7 billion (25% y-o-y) and we expect 2019 revenues to increase to $11 billion (22.1% y-o-y).

What Will Drive Growth In Adobe Revenues And Profits Going Forward?

Adobe’s recently added ability to create real-time customer profiles to deliver personalized experiences will be the key driver of revenue growth for the company as it will allow Adobe to target users across channels. Notably, Adobe’s ecosystem of partners (especially Microsoft and SAP through the open data alliance, and more recently Amazon through a tie-up) is likely to further deepen Adobe’s competitive moat. Given that the company processes hundreds of trillions of transactions annually, one can only imagine the scale and efficacy of insights that can be generated from its data, and how the effectiveness is likely to get further amplified across Adobe’s partner ecosystem.

Performance Over Recent Quarters, And Expectations For Q2 and Full-Year 2019:

  • Digital media: Segment revenues have grown by $2.4 billion over 2016-18 at a CAGR of 26.7%. 2018 revenue grew to $6.3 billion (26.2% y-o-y). Q1 revenue had increased to $1.8 billion (21.6% y-o-y). Q2 revenues grew to $1.9 billion (22.2% y-o-y) and we expect 2019 revenues to increase to $7.9 billion (25% y-o-y).
  • Digital experience: Segment revenues have grown by $0.8 billion over 2016-18 at a CAGR of 22.4%. 2018 revenue grew to $2.4 billion (20.4% y-o-y). Q1 revenue had increased to $0.7 billion (34.1% y-o-y). Q2 revenues grew to $0.8 billion (33.7% y-o-y) and we expect 2019 revenues to increase to $2.9 billion (17% y-o-y).
  • Publishing: Segment revenues have declined by $20 million over 2016-18 due to the company reducing its focus on legacy businesses. 2018 revenue grew to $0.3 billion (0.1% y-o-y). We expect these revenues to remain largely flat compared to the previous quarter.

We forecast Adobe’s EPS figure for full-year 2019 to be $5.82. Taken together with our forward P/E multiple of 56x for the company, this works out to a $325 per share price estimate for the company’s stock, which is lower than the current market price.

Do not agree with our forecast? Create your own price forecast for Adobe by changing the base inputs (blue dots) on our interactive dashboard.

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