MorningWord 9/20/16: An Adobe (ADBE) Reader

by Dan September 20, 2016 9:37 am • FREE ACCESS

Adobe (ADBE) reports tonight after the close. The options market is implying about a 4% one day move tomorrow, which is rich to the 4 qtr average one day post earnings move of 3.5%.  The one year chart below shows the volatility in the stock following the last two earnings reports. The stock made a new all time high on a 10% gap following their fiscal Q1 results in late February, but only closed up 4% that day. Then it had a nearly 6% drop following their fiscal Q2 results in late June:

ADBE 1yr chart from Bloomberg
ADBE 1yr chart from Bloomberg

Despite ADBE only mildly outperforming the Nasdaq’s year to date gains, the stock is up a whopping 40% from its 52 week lows made in February.  Put another way, the stock has had a nearly $20 billion gain in enterprise value from its lows. And that’s a company that is only expected to book a less than $6 billion in annual sales in the current fiscal year. ADBE trades 35x expected f2016 eps, 40x on a GAAP basis, and 21x EV/Ebitda.

As for that chart, the implied move of almost 4% either way puts the stock very near the recent all time highs made earlier this month just above $104, or just above near term technical support at $95. On a miss and guide down the stock is headed right back towards the February gap level, and the June low at $90 as it is already precariously below the uptrend that had been in place from the February lows.  On a beat and raise, the stock has no overhead resistance above the prior highs… and it will be off to LaLa land.

In late June the stock was down following a mild beat of the trailing quarter, and a slight guide down of the Aug quarter despite keeping the full year guidance intact. Per Barron’s Online:

In the company’s prepared remarks for the call, posted on the Adobe Web site, management projects revenue this quarter of $1.42 billion to $1.47 billion, which below consensus for $1.47 billion. The company sees earnings per share in a range of 69 cents to 75 cents per share, excluding some costs, in line with consensus for 71 cents a share.

Some details from the outlook:

In Digital Media, we expect to add approximately $285 million of net new Digital Media ARR during Q3, with strong year-over-year Digital Media segment revenue growth. In Digital Marketing, we expect continued momentum in bookings and approximately 7% year-over- year Adobe Marketing Cloud revenue growth in Q3 factoring in the strong perpetual revenue in the year ago quarter.

By most accounts this was a fairly benign guide lower, but I suspect the stock was priced for perfection, as it may be today.’s (CRM) fiscal Q2 results reported on Aug 31st, and Oracle’s (ORCL) fiscal Q1 results dropped last week may offer a window into the current demand for enterprise software at the moment (despite Cloud based sales being strong for ORCL), as both companies offered slightly disappointing guidance, both seeing their shares decline the following day by about 4.5% each.  I guess the main takeaway is that the competition is heating up, most companies in the space are looking to m&a to maintain growth and competitive positioning, and this could signal a new stage for companies like ADBE and ORCL who have spent years transitioning to selling software in the cloud through subscriptions as opposed to licensing. It may also signal that torrid growth is moderating, and as companies like CRM approach the $10 billion annual revenue mark, they are likely to see declaration. This may have investors once again questioning what they are paying for in these stocks.

We will follow up later today with some options trade ideas in ADBE for those who have a directional inclination or existing positions.