Event: Adobe Systems (ADBE) reports their fiscal Q1 results tonight after the close. The options market is implying about a 5.5% one day earnings move, which is rich to the 4 qtr avg one day move of about 2.5%, but in line with the 10 year average.
Price Action / Technicals: ADBE is down about 6.5% on the year, and down about 10% from its 52 week and all time highs made in mid December, following their Q4 results on December 10th. From its December highs, to its recent 52 week lows in early February, ADBE shares declined 26%, they have since recovered to the tune of 23% from those lows. The one year chart shows the downtrend, and the very close to converging 50 and 200 day moving averages. So the question is whether we have a golden cross (200 day crossing above the 50 day) signalling building upward momentum, or a death cross (the 50 day crossing below the 200 day) suggesting weakening momentum?[caption id="attachment_62250" align="aligncenter" width="600"] ADBE 1yr chart from Bloomberg[/caption]
Taking a longer term view, the uptrend from the late 2012 breakout has been fairly consistent, with a few meaningful tests, one in 2014, one in 2015, but it wasn’t until last month where the stock actually broke the uptrend. I think it’s safe to say that $70ish, what appears to be an epic double bottom, should serve as massive technical support:[caption id="attachment_62251" align="aligncenter" width="600"] ADBE 5yr chart from Bloomberg[/caption]
Sentiment: Wall Street analysts are fairly bullish on the stock with 19 Buy ratings, 7 Holds and No sells with an average 12 month target of about $102, about 16% higher than current levels. Short interest at less than 1.5% of the float.
Options Volatility Snapshot: Short dated options prices made new 5 year highs in February when the stock was in the throes of a 25% peak to trough decline. While 30 day at the money implied volatility has come in considerably from about 50% a month ago, to about 33% today, prices remain elevated and should settle with a 2 handle post results:[caption id="attachment_62252" align="aligncenter" width="600"] From Bloomberg[/caption]
Valuation: there is a fairly large gap, between a P/E on an Adjusted basis vs a GAAP earnings. On an adjusted earnings basis, EPS is expected to grow 33% to $2.76 in 2016, which places ADBE’s P/E at about 32, or 1x expected growth. On a GAAP basis, earnings are expected to grow 55% to $1.93, higher growth off of a lower base, but considerably lower on the E side, ADBE shares trade at 46x, a tad more egregious.
Why is this comparison important? Last June Barron’s got to the heart of the issue in an article titled How Much Do Silicon Valley Firms Really Earn?, emphasis mine:
“A company that pays employees entirely from its income statement is more attractive than a company that needs to issue and repurchase millions of shares per year for its employees.” Adobe, for instance, trumpets its buybacks, calling them a return of cash to shareholders. However, its equity issuance to employees has exceeded its buybacks in the past three years, resulting in a higher share count over that span.
So anyway you slice it, valuation is a moving target, relative to expected growth it is fair, on a GAAP basis it could stick out like a sort thumb if growth were to moderate.
My View: When the company reported Q4 results on December 10th they beat on most metrics with most of the focus on net new subs and annual recurring revenue (ARR) which show the health of their transition towards their cloud offerings, as subscribers beat handily.
If the company were to print a strong quarter and guide 2016 higher, then a rally above the implied move could easily be in the cards. Back in late February, shares of similarly sized Salesforece.com (CRM) gained 11% the day after their better than expected results.
A miss and guide down, which would be a reversal of two straight guides higher would place the stock in the $70s in the coming days.
We are in the process of evaluating a few different trade ideas and will post shortly.
Estimates and Forecasts from Bloomberg:
-1Q adj. EPS est. 61c (range 57c-64c); co. forecast 56c-62c (Dec. 10)
-1Q rev. est. $1.34b (range $1.31b-$1.41b), co. forecast $1.30b-$1.35b (Dec. 10)
-1Q creative cloud subscription adds est. 630k (avg of 2 ests. compiled by Bloomberg News)
NOTE: ADBE added 833k creative cloud subs in 4Q
-FY2016 adj. EPS est. $2.76 (range $2.69-$3.13), co. forecast ~$2.70 on Dec. 10
-FY2016 rev. est. $5.75b (range $5.66b-$6.20b), co. forecast ~$5.7b