Adobe (ADBE) closed a stellar fiscal 2017 with strong fourth-quarter results, as strong growth in Digital Media was augmented by solid results from Experience Cloud. Adobe will roll out its first set of price hikes across Creative Cloud since the company began migrating users to the subscription-based cloud service several years ago, and we think there is room for upside to management’s outlook for fiscal 2018. We are maintaining our wide moat rating. After rolling our model forward, we are raising our fair value estimate roughly 10% to $190 per share, though shares trade at only a modest discount to fair value. Still, we think investors should keep Adobe near the top of shopping lists should the shares display weakness moving forward.
Fourth-quarter revenue rose 25% versus the prior-year period to $2.01 billion, just ahead of our internal estimate. Creative Cloud remains Adobe’s cash cow, as the service delivered $1.16 billion in revenue in the fourth quarter and $4.2 billion for the full year, representing year-over-year growth rates of 31% for both periods. Although we think Adobe is beginning to exhaust the low-hanging fruit in terms of migrating legacy Creative Suite users to Creative Cloud, the firm has done an excellent job of mitigating sticker shock by creating standalone offerings such as the Photography Package at more digestible price points. We are encouraged Adobe is exercising its pricing power with Creative Cloud, and while this could yield some elevated churn in fiscal 2018, we think the dearth of viable alternatives to the offering will ultimately yield significant upside to Adobe’s core business.
Experience Cloud remains an intriguing opportunity, in our view, as we believe Adobe is delivering a best-in-breed solution that spans all major advertising channels. While Salesforce has upped its game in the B2C space with its acquisitions of Demandware and Krux, we believe both firms can amass share given their unique positioning and market approach.
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