Shares of Adobe (ADBE) are down about 2.5% as I write this morning on a downgrade from Deutsche Bank, per Bloomberg:
Adobe Systems faces lengthening sales cycles in its cloud marketing segment, writes Deutsche Bank analyst Nandan Amladi in a note citing recent channel checks and downgrading to hold from buy, PT $160 unchanged. Says valuation is “relatively full”; expects stock to trade sideways in near-term. Trims 5-year growth estimates in the marketing segment; leaves near-term estimates unchanged
The downgrade from Buy to Hold comes days before the company is scheduled to hold their annual analyst meeting on Wednesday. Credit Suisse, who rates the stock a Buy with a $170 price target had the following preview of expectations today in a note to clients:
We expect ADBE to potentially: (1) announce new Creative Cloud apps and services; (2) highlight its competitive differentiation; (3) update its addressable market opportunity; (4) discuss its product/growth strategy, particularly the near-term drivers; and (5) provide a
new financial outlook, including FY18 preliminary guidance / LT targets.
We expect mgmt to provide an update to their addressable market opportunity (~$24B in Digital Media and ~$40B in Digital Marketing), and highlight its net-new customer expansion efforts as well as premium features and services (higher ARPU). Additionally, we expect an update on the remaining Suite to Cloud migration opportunity (ADBE highlighted a remaining CS install base of ~7M seats at its last analyst day, vs. 8.3M the prior yr), which we believe could drive continued strength in Creative Cloud ARR (CS ests >+20% yr/yr to $5.576B in FY18).
The Wall Street analyst community, who are overwhelmingly bullish on the stock (25 Buy ratings, 7 Holds and only 1 Sell), are expecting fiscal 2018 guidance, but given the stock’s 4% plus decline following the company’s fiscal Q3 earnings on Sept 19th that included Q4 guidance, both in-line with consensus, I’d suggest that expectations were and remain high.
The options market is implying about a $3.35 move between now and Friday’s close, or about 2.2%, which seems reasonable when you consider how much the stock is down today alone on just a brokerage downgrade and the stock’s 4% decline following Q3 earnings on an inline print. As far as figuring the implied movement, its pretty easy…
with the stock at $150, the Oct 20th weekly straddle (the call premium + the put premium) is offered at $3.35, if you bought that, and thus the implied weekly movement you would need a rally above $153.35 or a decline below $146.65 to make money by Friday’s close. Obviously, picking a direction and buying the at the money call or put has you risking only about 1%, but as we often advise, you need to get a lot of things right on long premium directional trades into events, first and foremost direction, the second, magnitude of the move.
The technical set up in ADBE is fairly interesting for two reasons. First, despite the 5% decline from its recent all-time highs pre-earnings in September, the stock is still up 46% on the year. But the stock’s recent bounce off of the post-earnings weakness, and failed to make a new high, possibly suggesting some exhaustion as investors wait for the next piece of fundamental news that they hope will support the bull thesis, the very thesis that Deutsche Bank this morning warns might be waning, and the stock in for a possible re-rating. The uptrend that had been in place since late 2016 was violated by the Sept earnings gap, and that uptrend may now be acting as technical resistance, while support might now be near the recent low at $144, but possibly down to about $140:
If I were long the stock, worried about weak guidance, but uneasy about booking gains and paying taxes on them in 2017 I might consider a collar, which would allow me to participate in further gains, to a point, but also lock-in a level in which I would be protected. For instance:
Defining Risk/Reward for stock holders
vs 100 shares of ADBE at $150 you could buy the Nov 145 / 155 collar for even money
- Selling to open 1 Nov 155 call at $1.60
- Buying to open 1 Nov 145 put for $1.60
Break-even on Nov expiration:
Profits: of stock up to $155, capped above that. If the stock was $155 or higher on Nov expiration the stock would be called away, and you would book the gain and thus have a tax liability this year. But you could always cover the call and take the loss of the short option and keep the long stock position intact.
Losses: of the stock down to $145, protected below that.
Rationale: You are willing to give up a certain amount of upside to have a certain amount of downside protection. This trade structure is meant to be used tactically for a couple of reasons. First to lock in large ytd gains while also reducing the risk of paying taxes, but also the zero cost nature was meant to not pay for the protection.
If you did not have a position but had a directional inclination, the at the money call or put seem dollar cheap considering the potential for a sharp rally back to prior highs, if the company were to guide fiscal 2018 above consensus, while a guide lower would likely have the stock quickly back to its post earnings lows in the mid $140s.