Adobe (NASDAQ:ADBE) has recently discontinued the sale of Creative Suite 6, and now is solely focusing on licensing Creative Cloud (NYSE:CC). While CS was Adobe’s flagship product for over a decade, and offered to a user as packaged software with one-time perpetual license fee, CC is a subscription service that requires a user to pay a fixed monthly fee along with free upgrades to its latest version. The company reported faster-than-expected adoption of subscription licenses for its Creative Cloud (CC) business, as more of its clients chose to subscribe to it. The company reported over 2.3 million paid subscribers for the CC services at the end of second quarter. To ensure that the growth in this vertical continues unabated, the company recently announced 14 new versions of CC desktop applications, including essential tools such as Adobe Photoshop CC, Adobe Illustrator CC, Adobe Dreamweaver CC and Adobe Premiere Pro CC. In this note, we will look at the new CC offerings and how they can translate into higher revenues in the future.
Creative Cloud Bolsters its Portfolio
According to our estimate, the Creative Cloud (CC) division is the biggest of Adobe’s operating segment and makes up approximately 57% of the company’s value. Creative professionals such as design engineers, graphic designers, etc., believe that this field is evolving at a fast rate since new channels such as mobile, etc., are emerging that are driven by new technologies. Furthermore, the world is now more connected than before, and this trend is expected to continue in the future, as Internet penetration in countries with limited access grows. In light of this trend, Adobe has extended its CC portfolio to the mobile vertical with three new mobile apps for iPad – Adobe Sketch, Adobe Line, and Adobe Photoshop Mix. These new apps add significant mobile capabilities to CC, integrate workflows with the CC desktop apps, and bring tablets into creative workflows for the first time. Additionally, all of the latest desktop apps, mobile apps and creative hardware are tightly integrated through CC services. This will enable creative professionals to work across multiple devices that have different form factor.
Hardware Sales To Supplement CC
Adobe has also released new creative hardware called Adobe Ink, a new digital pen, and Adobe Slide, a new digital ruler. This will enable creative professionals to use CC services on mobile devices, primarily tablets. We believe that hardware sales have opened a new stream of revenue for Adobe, and continue to monitor the revenues generated through these sales to ascertain the market size of such devices.
CC To Drive Revenue In The Future
Apart from extending CC to mobile devices, Adobe has also released an improved version of CC and the 14 apps under its umbrella. Currently we estimate that the company is well underway to add over 3.4 million subscribers in 2014, and on track to add 10.8 million subscribers by the end of 2020. This figure represents 80% of the current 12.8 million point and suite licensees. We believe that the new feature rich version will entice trial users and existing point and suite licensees to adopt CC. If this were to happen the total addressable market size for CC will increase and so will the number of users. If subscription were to grow at a slower rate to 13 million, our stock price estimate can increase by 10%.
We currently have a stock price estimate of $58.14 for Adobe, which is 19% below the market price.
Disclosure: No positions.