RBC's MacMillan: Buy Adobe For These 3 Reasons

In a report published Tuesday, RBC Capital analyst Ross MacMillan upgraded the rating on Adobe Systems Incorporated (NASDAQ: ADBE) from Sector Perform to Outperform, while raising the price target from $88 to $105, for three reasons.

First, following an analysis of the company's CS6 base, the analyst believes that there is a large 3.6-3.8M new subscriber opportunity, which is currently underappreciated by the market.

Secondly, the analyst believes that the consensus forecasts of 10 percent and 20 percent opex growth for FY16 and FY17, respectively, would prove to be too high, while estimating opex growth of 7-8 percent for FY16 and FY17.

Third, new services launched by the company, such as Adobe Stock, are expected to drive higher ARPU, at least 15 percent above the current FY17 Non-GAAP EPS consensus expectation.

A survey by RBC Capital of usage of Adobe's products and Microstock services across 250 Creative Pros showed several positives, such as improvement in the adoption and value perception of Creative Cloud, as compared to the December 2014 survey, about 25 percent of those not already using the Creative Cloud intended to shift to it, and of those planning to move to Creative Cloud, about 60 percent intend to do so within the next 12 months.

On the negative side, however, the primary reasons for people not planning on moving to the Creative Cloud plan were its cost and functionality.

"We think ADBE is set to move from the mid stage of its model transition to the late stage, where revenue, EPS and CFFO accelerate. While metrics such as sub adds and ARR will remain relevant, we think investor focus will shift to accelerating fundamentals in the income statement which can drive outperformance," MacMillan said.

The revenue and Non-GAAP EPS estimates for FY16 and FY17 have been revised due to changes in RBC Capital's model.