That looks shopped – $ADBE

by Dan November 19, 2015 3:04 pm • Commentary

Last night (CRM) reported better than expected Q3 results and the stock is trading up 6%, breaking out of a seven month range to new all time highs:

CRM 1yr chart from Bloomberg
CRM 1yr chart from Bloomberg

Today’s gains of about $3.5 billion in market cap further stretch the stock’s earning’s multiple, approximately 86x expected fiscal 2017 earnings that should grow 30% on an adjusted basis this year, but swing from a ten loss in the current fiscal year, to only a 19 cent gain on GAAP basis.  But no worries, here was a headline that stuck out to me from their call:


As I said in my earnings preview yesterday:

There are few $50 billion market cap stocks, that A, trade 80x earnings, and B, have as overwhelmingly positive Wall Street analyst sentiment as CRM does, with 43 Buy Ratings, only 3 Holds and 3 Sells, with an average 12 month price target of $83 for the group.  Short interest sits at only 2% of the float.


There are two main reasons for the investor love affair with CRM. First, the company is a first mover in one of the largest secular shifts in the way businesses and consumers interact with computers.  Second,, because of the company’s positioning in cloud and SaaS offerings, CRM is considered to be a very valuable take-over candidate

As far as the last 2 points are concerned, there was little in the results that should cause investors or analysts to conclude that anything has changed, but at some point CEO Benioff will have to show investors the money so to speak.  But for now, the stock looks like it broke out of a long consolidation and will probably be bought on pullbacks to $80.

There is another large software vendor, who can thank much of this year’s gains to its transition to cloud based offerings. Adobe Systems (ADBE) is also making new all time highs today, nearing the $50 billion market cap mark. The company will report fiscal Q4 on December 10th after the close and the options market is implying about a 5.5% move between now and then.

I would add that Wall Street analysts are mildly less bullish on ADBE than is the case with CRM, with 18 Buy Ratings, 8 Holds and No Sells, but the stock is now at the average 12 month price target of most of the analysts polled.

On October 6th, ADBE management guided down for the next fiscal year, from Bloomberg:

Revenue for the year that ends in November 2016 will be about $5.7 billion and profit excluding certain costs will be about $2.70 a share, the San Jose…..Analysts on average projected annual sales of $5.94 billion and per-share profit of $3.20.

Since gapping down about 7% the next morning, below $80, the stock has done little else than rally, now up about 17% from the lows:

ADBE 6 month chart from Bloomberg
ADBE 6 month chart from Bloomberg

I guess there are a couple ways to look at this.  The company has already gotten a good portion of any bad news out of the way, and maybe it too breaks out to uncharted territory. Or maybe just maybe bad news followed up by bad news causes investors to hit the pause button. Investors struggle much less with ADBE than CRM on the valuation front, trading 37x expected eps growth of 37% next year, as sales growth is expected to re-accelerate to the mid teens.  Investors are crowding into growth at any price.  We will be sure to take a closer look prior to earnings, but at this point, there is no overhead resistance, and while sentiment is nothing short of positive, there seems to be little in the way of future gains (aside from broad market) between now and earnings.