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Bear of the Day: Adobe (ADBE)

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·3 min read
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Adobe (ADBE) is a Zacks Rank #5 (Strong Sell) that is a large diversified software company that operates worldwide. The company deals in digital media and cloud services that allow customers to access the latest versions of its creative products.

The stock had been a big winner over the last couple years, more than doubling since the start of 2020. However, a recent disappointment in earnings erased the last few months of gains.

With earnings estimates starting to fall, investors are now concerned that the bull run might be over.

About the Company

Adobe is headquartered in San Jose, CA and employs over 22,000 people. The company was founded in 1982 and picks up most of its revenue from licensing fees from customers.

Adobe is valued at $275 billion and has a Forward PE of 42. The company holds a Zacks Style Score of “A” in Momentum and “B” in Growth, but "F" in Value. That valuation is scaring some investors away after the company barley beat on earnings last quarter.

Q4 Earnings

Adobe reported December 16th, just barely beating on the bottom line by 0.63%. Revenues also missed, but the headline EPS number was the focus and the stock was sold after the release. While the company never crushes expectations, this was the smallest EPS beat since the company missed in late 2018.

Adobe Inc. Price and EPS Surprise

Adobe Inc. Price and EPS Surprise
Adobe Inc. Price and EPS Surprise

Adobe Inc. price-eps-surprise | Adobe Inc. Quote

Adobe also guided lower, now seeing Q1 at $3.35 v the $3.37 expected and FY22 at $13.70 v the $14.16 expected. Revenue guidance was also lowered.

Year over year subscription revenues were up double digits, but it wasn’t enough to impress the markets or analysts.

Estimates

The guidance forced analysts to drop earnings estimates for all time frames. For next quarter, we have seen just a 1% drop over the last month, falling from $3.37 to $3.34.

For next year, we have seen number fall from $16.63 to $16.04 over that same time frame. That’s a drop of 3.5% and tells us analysts see a slowdown coming for the company.

Because of these lowered expectations, price targets for the stock have come down since earnings:

CitiGroup reiterated ADBE with Neutral and a price target of $611, down from $678.

Morgan Stanley reiterated ADBE with Overweight and price target of $652, lowered from $736

Credit Suisse reiterated ADBE with Neutral and a price target $625, down from $700.

With analysts lowering their numbers and price targets, the stock has been getting sold.

Technical Take

Some key technical support levels have been broken since making highs back in November. The 50-day moving average was the first to go, as the stock dropped below that mark before earnings.

The stock gapped lower after EPS and then took out the 200-day MA and continued to lows not seen since June. The recent low made around $550 was the 61.8% Fibonacci retracement drawn from the May lows to September highs. If the bears want to push this stock lower, they must take that $550 level out and could possibly push to the $450-500 area.

If the bulls want to gain some traction back, they need to take the $583 level and then fill the gap at $600. Until then, the sellers will stick around.

In Summary

Adobe is one of the largest software players around, but a lot of the money has been made in this stock and the valuation is coming into question. The stock might see some pressure in the near-term, so investors should hold off until both the fundamentals and technicals start clicking again.

For now, a better option might be Salesforce (CRM). The stock is a Zacks Rank #1 (Strong Buy) and the company is coming off a 38% EPS beat about a month ago.


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