$ADBE Q3 Earnings Preview

by Enis September 10, 2013 11:27 am • Commentary

Event:  ADBE reports their fiscal Q3 earnings on September 17th after the close.  The options market is implying about a 4.5% one day move, which is slightly below the 4 qtr avg of about 5%, but in line with the 8 qtr avg of about 4.5%.

Sentiment:  Wall Street analysts are quite mixed on the stock, with 14 Buys, 11 Holds and 2 Sells, with an average 12 month price target of around $50.50.  Short interest is around a 5 year low, at only 1% of float.

Options Open Interest:  Open interest is evenly split between calls and puts, and the volume over the last month has been very limited (less than 1k options per day in either puts or calls).  The largest near term open interest is the Sept 48 calls (nearly 2k), and the Oct 45 calls (4450) and Oct 45 puts (2402).

Price Action / Technicals:  ADBE’s monthly chart shows a stock that is revisiting the 40-50 area for the 3rd time since the year 2000:

Monthly chart of ADBE, red line at $48.50, courtesy of Bloomberg
Monthly chart of ADBE, red line at $48.49, courtesy of Bloomberg

The key level in the near term is the $48.49 level that was the high back in 2007.  ADBE briefly broke above that level on July 12th, but was unable to hold above there throughout July.  The stock has rallied back to near that resistance area to start September, and a clean break to new all-time highs would be a very positive technical development.  Otherwise, important support is in the 43-45 area, where buyers are likely to get interested.   

Fundamentals:  Investors have greeted ADBE’s transition to a Software-as-a-Service Model with optimism.  While the stock’s EPS has declined from 2.35 in calendar year 2011 to a projected 1.46 for calendar year 2013, investors are clearly assigning a higher multiple on future earnings from ADBE given the shift in the business model.

In the most recent quarter, the company obtained about 35% of revenues from subscribers and support services, vs. closer to 20% in the same quarter in 2012.  Revenues were actually down 10%, and costs were up a bit more than 10%, so earnings were only one third of what they were in the same quarter in 2012, but the scaleability of the subscription model is the main attraction.  It’s not a fight to sell new product each quarter.

Having said all that, with the stock near all-time highs, this quarter sets up as a crucial pivot point with expectations elevated.  ADBE is currently trading at around 30x the consensus 2014 earnings number, though analysts are modeling 30%+ earnings growth in the 2015-2017 period.  But with the stock’s technical position, this quarter’s results are key.

Volatility:   ADBE has been a much less volatile stock from a realized volatility perspective in the past month compared to its price action over the past year:

[caption id="attachment_30077" align="alignnone" width="600"]30 day implied volatility (red) vs. 30 day realized volatility (blue), Courtesy of LiveVolPro 30 day implied volatility (red) vs. 30 day realized volatility (blue), Courtesy of LiveVolPro[/caption]

Realized volatility hit its lowest level in the past year (including holidays), as ADBE has remained between 45 and 48 for most of the past 2 months.  Implied volatility has risen ahead of the earnings report, but it is at a lower level than prior to 3 of the past 4 earnings reports.  1 month implied volatility will likely fall into the high teens after the report.

Trades:  Stay tuned for our thoughts on potential trade structures that we’ll be posting ahead of next week’s event.