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How Adobe Became the New, Top Cloud Play

Based on the first-quarter results, total Creative annualized recurring revenue (ARR) representing subscription customers on an annual basis has been $987 million, a good, 29% increase from the $768 million in Creative ARR from the fourth quarter. Total digital media ARR came in at $1.151 billion. These roughly $1 billion figures are a rough estimate of the base level from which Adobe's annual subscription revenues could grow.

As the lock-in effect gets stronger, Adobe is expected to be able to within reason raise its average revenue per user per month from the current $35 to $37 that right now includes discounts.

While the cloud is the business model by which Adobe is expected to realize steady, robust revenue in the coming years, it's of course, equally important to note that the core, underlying product delivered by the cloud will continue to keep the company shielded from competition.

The Creative business has no competitors of note that it can be compared with in the stock market. While Corel also makes production products, it's a private-equity owned company. Microsoft (MSFT) once tried, but failed to compete with Adobe's Creative business through "Microsoft Expression," which was launched in Sept. 2005 but terminated in Dec. 2012 after failing to gain traction.

There are also a couple of free, open source digital content creation, editing and publishing tools in the market, but again, none of them approach anywhere near the market share of Adobe's premier, industry-standard setting product consisting of a full suite of applications. The apps for tablets and smart phones that offer only quick, point photo editing can at worst nibble at Adobe in the lowest end of the spectrum. Apple (AAPL) has plenty of content editing and content creation-type software, but they're not typically used in a professional setting.

In assessing its core, Creative Cloud and Marketing Cloud positioning, Young says he considers Adobe as a wide moat company with a "fantastic business."

"I think they have incredible barriers to entry," he said. "If you're somebody who is in digital design, content editing, and video editing, you're almost certainly trained on Adobe products in school. And because of that, you almost certainly use Adobe products when you leave school. They're almost what I like to call it a de facto industry standard, right. Adobe is a good way also to play the digital content creation and measurements side of the business of technology, which is incredibly compelling right ... this is what you consume on the Internet -- it's hard to separate the Internet from that and so it's kind of an interesting way to play that."

After Adobe's quarterly report Tuesday, Deutsche Bank technology analyst Nandan Amladi hiked his price target on the stock to $75 from $65, maintaining his "buy" recommendation. Jefferies's Ross MacMillan reiterated his "buy" view with an $80 price target. Sterne Agee's Robert Breza also kept his "buy" rating with an $80 target.

-- Written by Andrea Tse in New York

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