NEW YORK (TheStreet) -- Shares of Adobe (ADBE) closed Friday at $66.82, up nearly 12% for the year to date although below its March 18 intraday high of $70.24. I see this stock as an excellent buying opportunity.
Given management's aggressive subscription targets and the company's geographic expansion plans, now is not the time to bet against Adobe. Fair value should reach $80 per share, assuming the company can generate upwards of $5 billion in combined revenue for Creative Cloud and Digital Media business.
Digital media competition from (among others) Google (GOOGL) and Microsoft (MSFT) has not pressured Adobe into timidness. Even though Adobe is transitioning from its traditional boxed software model to a cloud-based subscription delivery platform, management is not running away from pressure.
The company expects to have roughly three million paid subscribers on this platform by the end of 2014. Adobe ended the March quarter with 1.8 million subscribers, which means management expects to net an additional 1.2 million subscribers in the next three quarters, or 400,000 per quarter. These are not conservative figures.
Still, with the company having added 405000 subscribers in the March quarter, the company is on track to meet its goal. Assuming it does meet this goal, the Creative Cloud business, which now makes up 20% of the Adobe's total sales, will generate almost $2 billion in recurring revenue. That's an impressive number -- not to mention, this is a platform still in its infancy.
The company's digital marketing cloud generated roughly $1 billion in revenue last year. Adobe has benefited from a strong brand recognition, which has led to a faster-than-expected rate of adoption. With the company due to report second-quarter earnings Tuesday, investors would be wise to embrace the market's clear-cut leader in the digital marketing space.
On Tuesday the Street will be looking for 30 cents in earnings per share on revenue of $1.03 billion. Essentially, earnings are expected to decline 16.67% year over year, while revenue is projected to grow 1.6% year over year. But don't let these numbers fool you.
Adobe is rebuilding itself. The weak revenue and declining earnings are a product of the business model transition. The fact that subscription revenue accounts for roughly 30% of Adobe's total business reflects how quickly the company has been able to execute this changeover.
But it's not just about the creative cloud. There's also the Digital Media, from which the company expects to generate over $2.5 billion in revenue by the end of 2014. That's 20%+ growth rate year over year. And with management's plan to expand in new geographies and vertical markets, Adobe's growth potential has really just begun.
The degree to which management has converted the business model in such a short period of time is nothing short of impressive. Not only have customers embraced the subscription the service, in some case, they're willing to pay more.
To that end, what management says about the future of cash flow and when the company will return to profitability will weigh on the near-term direction of the stock. But with the company still several more quarters away from being a full-fledged subscription business, Adobe remains a long-term play.
At the time of publication, the author held no position in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.