How AdMarketing Cloud Can Impact Adobe’s Stock Price

Just over 27% of Adobe’s valuation can be attributed to its marketing cloud initiative. According to Adobe’s SEC filings, it generated over $1.63 billion revenues from its marketing cloud initiatives in 2016. (Fiscal year ends with November.) The primary reason for this growth is the comprehensive marketing offering includes a complete set of analytics, social media optimization, consumer targeting, web experience management and cross-channel campaign management solutions. In addition to traditional capabilities in digital marketing, the company also has rolled out digital marketing and advertising services for Over The Top video TV content through its Primetime services. In the most recent move, it acquired TubeMogul, a programmatic ad tech company that can run campaigns across digital screens, television and out-of-home channels. Considering the rapid adoption of Adobe’s marketing cloud, we believe that Adobe’s revenue could increase significantly. On the other hand, competition from player’s such as SAP, IBM, Oracle and is intensifying and can eat into Adobe’s leadership. In this note, we explore the upside to Adobe’s stock price due to Adobe marketing. We also discuss the factors that can drag this division down.

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Upside To Marketing Cloud

Adobe’s cloud marketing division is its second biggest division. Over the past few years, Adobe has built a comprehensive digital marketing platform that addresses most of the needs of digital marketers. This build-up started in 2009 with the acquisition of Ominiture. Since then, the company has scaled up the functionality and product offering of its marketing platform through organic and inorganic growth. Currently, Adobe offers eight products under its marketing cloud solution. The Adobe marketing cloud includes a complete set of analytics, social media optimization, consumer targeting, web experience management, programmatic TV ad tech and cross-channel campaign management solutions. It generated around $1.63 billion in annual revenues in 2016.

Having been built inorganically, the business has had a compounded annual growth rate of 47% over 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 Trefis’s estimates, the marketing cloud has a total addressable market of over $363 billion and is easily a $10 billion opportunity. Currently, we project revenues from its digital marketing division will reach $4.96 billion by the end of our forecast period in 2023. Recently, the company augmented its Marketing Cloud solutions with the acquisition of TubeMogul.  Considering this expansion and the past growth rate, it is possible for the company to achieve a CAGR of over 20% instead of the currently projected 14.8%. If this were to materialize, Adobe’s revenues could increase to $5 billion, and the stock price valuation can increase by 15%.

Competition Can Drag Growth Down

The digital marketing industry is highly fragmented and vendors are using different methods to grow their business. These range from acquiring startups, to offering their core products for free (under the freemium model), and on to organically developing their core competency. These competitors have also embarked upon a similar acquisition strategy to gain a foothold in the niche segment of the digital marketing industry. This points to intensifying competition in the industry as each player tries to gain a leg up on others. While Adobe is focused on the technology aspect of digital marketing, its solutions have cost and complexity issues that leaves potential openings for competitors. Competing players such as IBM, Microsoft (Dynamic CRM), and Oracle are trying to improve their position in the market by leveraging their existing partnerships and offering their solutions as Paltform-as-a Service (PaaS). Therefore, it is possible that revenues from its digital marketing division can grow at a slower rate to reach $3.2 billion by the end of our forecast period. If this were to materialize, then Trefis’ estimated stock value can be lower by 9%.

We currently have a $107 price estimate for Adobe, which is in line with the current market price.

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