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Adobe Closing In On a Support Level Prior To Earnings

Daniel Laboe

Cloud powerhouse Adobe ADBE is getting ready to release its 3rd quarter earnings Tuesday, September 17th, after the bell. Analysts are anticipating the firm to post its strongest financials to date. ADBE shares have appreciated roughly 24% so far this year, 11% off its all-time high which it hit in July. Sound Q3 earnings could propel this stock to new highs.

Zacks Consensus estimates for Q3 consist of an EPS of $1.59 on sales of $2.8 billion, which would represent year-over-year growth of 12% and 22.7%, respectively. ADBE is typically not a huge mover on earnings reports, but it has moved more than 5% twice over the last 3 quarterly reports (1 up, 1 down).

Cloud players like Microsoft MSFT, Salesforce CRM, and Google GOOGL all illustrate strong earning in their last quarterly release, which should be a positive sign for the Adobe results to come.

The Business

This firm’s performance has been extraordinary since its pivot to cloud-based software, which began in mid-2013. They were an early mover on this type of subscription-driven software and have been able to reap the benefits. 89% of Adobe’s revenue in the 1st half of 2019 was subscription-based and being delivered to customers through the cloud. The stable reoccurring sales are pushing year-over-year as well as quarter-over-quarter growth nowhere but up.

Adobe has been able to niche itself in the cloud software market. It is now a must-have software for professionals in both creative fields and marketing. They are the clear leader in digital content creation which is a category that is only going to grow as our society becomes increasingly digitalized. Being an essential provider of software for professionals in a growing industry gives this firm a solid backing for a buy recommendation at the right valuation.

Trading & Valuation

ADBE is approaching its 200-day moving average ($169.54), which has been a relatively decent support level for this stock over the past 5 years. ADBE has bounced off this level at least once every time it is tested. The 200-day moving average (green) could be a technical level to buy at if the 50-day average (red) can stay above that level.

Adobe is currently being valued at a forward P/E of 36.5x, which is slightly below its 5-year trend, trading between 32x and 45x for the past 3 years. Its current valuation is reasonable considering its exceptionally consistent sales that have demonstrated 20%+ growth for 16 consecutive quarters. Sell-side analysts are anticipating this trend to continue with 23% growth for this year.

Take Away

Adobe is a model firm that has been able to pivot to a cloud-based software firm with enormous success. Over the last 5 years, this stock has rallied almost 300% with nothing but clear skies ahead.

ADBE is coming close to its 200-day support level, and this earnings report on Tuesday will likely drive it one way or the other. Look for a miss on either metric for a downside price action as well as management guidance and sentiment.

 

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