Adobe Systems (ADBE) will report its fiscal Q3 results today after the close. The options market is implying about a 7% move in either direction or about $34 which is about in line with the average one-day post-earnings move over the last four quarters.
Shares of ADBE are up 50% on the year, up 95% from its March low and down only 7% from its all-time high made on Sept 2nd. Since the March lows the stock has held the uptrend like a boss, never closing below its 50 day moving average which now lines up with the uptrend and the breakout level near $470 which should serve as near term technical support, just as the prior high, which matches up with the implied move should serve as near-term technical resistance:
The stock trades at an obscene multiple of earnings and sales for a ~$240 billion market cap (51x / 19x – 2020 & 45x / 16x – 2021 expectations) for a mid-teens grower for fiscal 2021.
My friend Jared Weisfeld, tech specialist extraordinaire from Jeffries, as seen frequently with me on Fast Money on CNBC detailed the following set-up in the stock into the print in a note to clients (emphasis mine):
I can’t remember a time in recent memory when sentiment was this positive on ADBE and rightfully so given the benefits that ADBE should see across Digital Media and Digital Experience segments. Thill had his preview out last week (https://bit.ly/3itrtXY) and he highlighted the conservative nature of the Net New ARR guide. I couldn’t agree more as guidance of $340mm implies a 23% q/q sequential drop vs. the 3 year average of 2.5%. Thill and team notes that datapoints across their coverage indicates demand remains robust for digital content creation, whether for websites, e-commerce, or social & video entertainment. In addition, Document Cloud is an under-appreciated growth driver, as seen in e-signature competitor DOCU’s 61% billings growth in their July qtr. From my conversations, buyside is close to $400mm of Net New ARR for Q3 (I’ve heard anywhere from $375-$400mm+). While on the surface, it would represent a large beat at ~17% vs. the guide, it would only represent 4% y/y growth vs. the LT trend-line of DD growth and it would also represent a sequential decline of almost 10% vs. the 3 year average of 2.5%. To help put in perspective, last quarter the Company delivered $443mm of Net New DM ARR vs. guidance of $385mm (15% beat).
So sentiment is really positive in the stock coupled with a conservative guide last quarter for Net New ARR (annual recurring revenue) which on a beat would result in a large sequential decline. Clear as mud how to play this right?
So what’s the trade?
If I were inclined to play for a beat and raise in a better tape than the last couple week’s than I would expect the stock to be up initially inline with the implied move back towards its prior high of $537, possibly as high as $550, or about 10%. But I would expect that pop to be sold and would look to play with weeklies, risking what I am willing to lose, for instance:
Bullish Trade Idea: ADBE ($498) Buy Sept 500 – 500 call spread for $13
-Buy to open 1 Sept 500 call for $15.50
-Sell to open 1 Sept 550 call at $2.50
Break-even on Sept expiration:
Profits of up to 37 between 513 and 550 with max gain of 37 above 550
Losses of up to 13 between 500 and 513, with max loss of 13 below 500
Rationale: this trade idea risks 2.6% with a break-even up 3% and a max gain of 7.5% if the stock is up 10.5% by Friday.
Or If I were inclined to play for a move lower below its uptrend and possibly back towards 450 in the coming weeks.
Bearish Trade Idea: ADBE ($498) Buy Oct 490 – 440 put spread for $15
-Buy to open 1 Oct 490 put for 25
-Buy to open 1 Oct 440 put at 10
Break-even on Oct expiration:
Profits of up to 35 between 475 and 440 with max gain of 35 at 440 or lower
Losses of up to 15 between 475 and 490 with max loss of 15 at 490 or higher
Rationale: this trade idea risks 3% of the stock price, has a break-even down 4.6% and has a max gain of 7% if the stock is down 11.5% in a month.