Name That Trade – $ADBE: That Looks Shopped

by Dan June 15, 2015 1:12 pm • Commentary

Event: Adobe (ADBE) reports fiscal Q2 results tomorrow after the close. The options market is implying about a 5% one day move which is shy of the 4 & 8 qtr avg one day moves of about 6%.

Price Action / Technicals:  Shares of ADBE have outperformed the Nasdaq Composite, by a few % ytd, 9% vs 6% respectively.  Since making new 52 and all time highs in late February, the stock has failed at those highs on numerous occasions, with $80 serving as fairly staunch technical resistance, while the stock has held the uptrend that has been in place from the October lows, almost 35% lower:

[caption id="attachment_54465" align="aligncenter" width="600"]ADBE 1yr chart from Bloomberg ADBE 1yr chart from Bloomberg[/caption]

Another way to look at this chart would be the fairly staunch technical support the stock has between $75 and $70, which was the breakout level a year ago:

[caption id="attachment_54466" align="aligncenter" width="600"]ADBE 2yr chart from Bloomberg ADBE 2yr chart from Bloomberg[/caption]

Valuation:  ADBE trading at 38x expected 2015 eps of about 2.10, and 8x expected sales of a tad less than $5 billion is far from cheap for a software company with a $40 billion market cap. The shares fairly adequately capture a bit of the enthusiasm associated with their ability to rapidly grow subscribers for their Creative Cloud suite.

Expectations:  In mid March, ADBE did hit their guidance for Q1 but guided down current quarter with revenue expected to be in the range of$1.13 billion to $1.18 billion, and EPS in a range of 41 cents to 47 cents which is shy of consensus estimates of $1.18 billion and 48 cents.  The stock declined 3.5% the next day.

In mid January the company announced a bump to their share-back program (here) to the sum of $2 billion by the end of 2017, so not expecting surprises on the capital return front.

Volatility Snapshot:  The spread between 30 day at the money implied volatility (white below, how much the stock has moved) and 30 day at the money implied vol (blue below, the price of options) has reached the widest gap in nearly a year. This is a function of the stock’s consolidation near the highs, with growing skepticism from options traders, or those seeking near term protection:

[caption id="attachment_54470" align="aligncenter" width="600"]ADBE 1yr chart of 30 day at the money IV vs realized from Bloomberg ADBE 1yr chart of 30 day at the money IV vs realized from Bloomberg[/caption]

My View: into the print I would expect it would take a meaningful beat and raise for the stock to breakout to the tune of $4 to the upside, while I suspect it would be far easier for the stock to achieve that move to the downside if the company would missed modestly reduced guidance from March.  We will take a closer look tomorrow prior to the close, and are considering trades that fade the implied move, with a slight downside lean.

Stay tuned.