Adobe (ADBE) Shop

by Dan March 16, 2017 1:48 pm • Trade Ideas

Adobe (ADBE) reports their fiscal Q1 results tonight after the close. The options market is implying about a 3.5% one day move tomorrow, which is shy of the average one-day post-earnings move of about 4.5% over the last 4 quarters and the below the 10 year average of 5.15%.

Shares of ADBE are up 18% on the year, this morning, making a new all-time high, before pulling back 1%. The stock is up 41% from its year-ago levels,  While a meaningful sell-off in the stock, or any stock for that matter seems unlikely without the combination of a broad-market decline with specific adverse fundamental news, the Jan breakout level of $110 would be a clear downside target, while there is NO overhead resistance:

ADBE 1yr chart from Bloomberg

For those of you who believe a next leg of a secular bull market started in 2013, then ADBE would be the poster-child for the bull, breaking out above its 2000 and 2007 highs in late 2013, and never looking back, rising 150% vs the S&P 500’s (SPX) 50% gains since November 2013:

ADBE since 1999 from Bloomberg

Wall Street analysts are fairly positive on the story, even at theses lofty levels, with 21 Buy ratings, 9 Holds and no sells and an average 12 month price target of about $126, not too far from where the stock currently trades.  The stock trades 32x expected EPS growth of 26% in 2017, and 25x expected 2018 eps growth of about the same. It all seems fairly reasonable when you consider current consensus is calling for 20% sales growth in 2017 and 2018. While its multiple to sales is hefty for a company expecting to book $7 billion in sales, I would add that there are very few large-cap tech companies growing sales at 20% off of that sort of base. For instance, (CRM) grew sales 26% last year to $8.4 billion, with GAAP eps of only 26 cents, vs ADBE’s eps of $2.32 on $5.85 billion. Not all SaaS company’s profitability are created equal! If we were playing would you rather, I think it’s fairly clear that ADBE is a better bet on valuation, relative to growth and profitability.

But for now, despite PE to Growth that is attractive, and obviously relative valuation, ADBE shares are priced to perfection, with fairly bullish sentiment.

Therefore long holders with healthy profits might consider a dollar cheap hedge into earnings with the stock at all time highs:


vs 100 shares of ADBE ($122.10) Sell the April 130 call to buy the April 115/110 put spread for .15
  • Sell 1 April 130 call at .85
  • Buy 1 April 115 put for 1.10
  • Sell 1 April 100 put at .10


Break-evens on April expiration – Gains and losses in the stock between 115 and 130. Called away in the stock above 130 (6.5% higher, about twice the implied earnings move) Protection in the stock from 115 to 100, locking in profits at 115. The most likely scenario is losing .15 for the hedge.

And what about those looking to buy some of these high-performing stocks but terrified of this entry? Defined risk is possible:

Stock Alternative/ Replacement

In Lieu of 100 shares of ADBE ($122.10), buy the April 120/130/140 call fly for 3.00
  • Buy 1 April 120 call for 4.70
  • Sell 2 April 130 calls at .90 (1.80 total)
  • Buy 1 April 140 call for .10


Break-even on April expiration – Losses of up to $3 below 123 with max loss of $3 below 120. Gains of up to $7 above 123 with max gain of 7 at 130, profits trail off above 130 with losses possible above 137. Profitable range of 123 to 137. This defines risk to just $3, less than the implied move on earnings and its breakeven is just $1 higher than the current stock price.