Adobe is getting stung by a downgrade from RBC this morning based on the fact that it’s changing it revenue model.Here’s the key points from Robert Breza at RBC:
We believe the transition from a perpetual model to reoccurring revenue based on a 12-month release cycle, while positive for the long-term, will likely create near-term volatility compounded by macro issues which could cause the stock to test and even break valuation levels seen in 2008/2009. Adobe’s current FTM PE is 10.2x, which is essentially in-line with its 2009 low of 10.4x (11.7x in 2008). In addition, we believe Adobe’s consumer and SMB markets may come under increased pressure in the second-half of CY’11 as those customers likely look to reduce/control spending which could negatively impact Adobe’s CS5.5 launch. Again, we like the longer-term implication from a more stable business model, and would look to become more constructive once the business model stabilizes. However, until then we would avoid shares of Adobe and are downgrading to Underperform from Sector Perform and reducing our price target to $22 from $32.
Adobe’s Industry Backdrop – Remains Challenged
Adobe is heavily influenced by the indirect advertising market which is highly discretionary. The number of indirect creative professionals have been at a minimum displaced in major industries such as newspapers and magazine publishers causing many of them to become independent contractors that are more price sensitive and do not upgrade as often. We believe this pro-consumer subsegment which could account for as much as 30% of revenues is undeserved by Adobe with its high price point CS5.5 suite. We believe a more price sensitive, supplemented strategy could reinvigorate growth.