Adobe (NASDAQ:ADBE) entered the digital marketing industry in 2009 with the acquisition of Omniture. Since then, the company has expanded its services systematically, and currently offers six products under its marketing cloud solution. The Adobe marketing cloud includes a complete set of analytics, social, media optimization, consumer targeting, web experience management and cross-channel campaign management solutions. The digital marketing cloud makes up 20% of Adobe's estimated value and generated around $1 billion in annual revenues in 2013. Having been built from the acquisition, the business has a compounded annual growth rate (CAGR) of 106% over the last four years. Well positioned in a growing market, this division is expected to witness robust growth in the coming years. In this article, we will review the factors driving the digital platform and Adobe's product offering.
Drivers For Digital Marketing Solutions
Digital marketing is gaining momentum as companies are looking engage users with personalized content across channels and on all devices. As a result, company budgets for online marketing are fast gaining traction. According to IT research firm Gartner, companies spent 3.1% of their revenues on digital marketing in 2013, and the figure is expected to rise to 3.4% this year.  The trends supporting an increase in digital marketing spends are as follows:
- Digital commerce on the rise: With Internet penetration on the rise, many new businesses are opening electronic store fronts and more businesses are shifting from brick and mortar stores to online stores. According to eMarketer, business to consumer (B2C) e-commerce sales in the world is expected to reach $2.357 trillion by 2017.  However, e-commerce businesses such as shopping websites need to understand the customer's buying behavior and preferences to boost their sales. This calls for a digital marketing platform that can analyze user data to enhance user experience and facilitate higher sales. Moreover, online advertisers also need a strong platform that can help them discover prices for online ads. Therefore, marketing tools for big data analysis and consumer experience are gaining traction among marketers.
- Mobile Marketing To Main Fold: First time users in many countries are logging onto the Internet using smart connected devices. According to eMarketer, the amount of time people spend on a mobile device is growing 14 times faster than desktop usage. Additionally, mobile commerce (m-commerce) is becoming a prominent channel for commercial transactions. eMarketer forecasts that retail m-commerce sales in the U.S. will reach $57.79 billion this year and climb to well over $132.69 billion by 2018.  As a result, mobile-first marketing strategy is gaining traction across the globe. However, since the mobile audience is fragmented by devices and platforms, marketers face a difficult task to distribute the content across these devices and screen sizes. We expect that this will drive the innovation cycle for omni-channel marketing tools. However, we believe that incumbents in mobile marketing will continue to gain market share in the near future.
- Content Marketing: Content marketing is focused not on selling but on communicating brand ideas or insights to a customer. Marketers rate content marketing as the most important opportunity as it pervades all digital media. As Internet penetration grows, marketers are looking to leverage content such as videos, infographics, articles and e-mails to deliver their message to customers across different channels. However, most of the marketers are focusing on content creation rather than content optimization. We believe that companies need to focus on placing relevant content that can be personalized as this can increase web traffic and ad revenues. Therefore, demand for a marketing platform from companies such as Adobe and IBM (NYSE:IBM) continues to rise.
- Social Media Marketing: The rise of social networking sites such as Facebook (NASDAQ:FB), Instagram and LinkedIn (NYSE:LNKD) is providing marketers opportunities to interact with audiences in innovative ways. Social media marketing is akin to word of mouth marketing by which readers are encouraged to share curated content on their social network. Currently, marketers use over four social media channels to engage customers. However, as social media marketing gains traction, marketers are expected to leverage additional social media channels. We believe that a multi-channel social media engagement strategy will drive growth in digital marketing platforms that can track and deliver value.
Adobe's Marketing Platform
Over the past few years, Adobe has built a strong platform that addresses various needs of digital marketing. We believe that this platform not only provides a cost-effective digital marketing solution to companies but also helps them manage marketing campaigns across different channels (online and offline) and devices. Adobe's marketing cloud is one of the most comprehensive and integrated marketing solution available in the market which includes Adobe Analytics, Adobe Target, Adobe Social, Adobe Experience Manager, Adobe Media Optimizer, and Adobe Campaign, as well as real-time dashboards and a collaborative interface.
Adobe Analytics is a big data analysis tool that helps CMOs understand the performance of their businesses across all digital channels. It enables real time web, mobile and social analytics across online channels, and data integration with offline and third-party sources. Adobe Target is a test and target tool that helps in improving user experience and maximize business results by employing a rules-based targeting. Adobe Social allows marketers to create, publish, monitor and respond to conversations, measure results, and connect social activities to business results. Adobe Experience Manager is a content management platform that enables organizations to deliver carefully tailored customer experiences across web and mobile channels. Adobe Media Optimizer provides campaign forecasting and targeted ad delivery for data optimized advertising. Adobe Campaigns enables a marketer to plan and execute orchestrated campaigns across all channels.
We expect Adobe's marketing platform to continue to lead the digital marketing solutions market in the short term, as it enjoys strong brand recognition. Adobe is aiming to increase its revenues from cloud based marketing solutions by expanding in new geographies and vertical markets where it has a strong presence. Currently, we project revenues from its digital marketing division to reach $3 billion by the end of our forecast period. However, if the revenues grew to $5 billion by the end of our forecast period there can be 15% upside to our price estimate.
We currently have a $51.72 price estimate for Adobe, which is around 15% below the current market price.
Disclosure: No positions.