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Adobe: A Case For Trend Trading
By Dian L. Chu, Economic Forecasts & Opinions
Adobe Systems Inc. (ADBE) shares got slammed big time on Wednesday in heavy volume after the company gave a weaker-than-expected guidance for its fiscal fourth quarter. Price plunged 19% to $26.52 in after hour trading after hitting a 52-week low of $25.81 earlier. (See the ugly chart from WSJ.com)
While some analysts said the company's longer-term prospects remain solid as the economy recovers, there are warning signs indicating otherwise.
Adobe, best known for Photoshop and the Flash technology for online games and video websites, actually reported a stronger-than-expected fiscal Q3 earnings--$0.44 per share, up 69% year over year—getting a boost from strong demand for its flagship Creative Suite 5 (CS5) software package and its large enterprise customer base.
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The strong recent momentum has built up high market expectation. But investors remained cautious as demand for Creative Suite (CS5) has picked up along with an improving economy; it is not selling as brisk as its previous version (CS3) from before the financial crisis.
Then, Adobe confirmed investors' worry- the company said weak education markets in the U.S. and Japan will lead to its current-quarter revenue in its creative solutions business, including CS5, to be flat to down slightly from the previous quarter. Since Creative Suite is Adobe’s core product accounting for 55% of the company's revenue over the past twelve months, Adobe’s earnings visibility--for the two to four quarters--is quite clear.
There are other bearish indications. Earlier this year, Apple (AAPL) decided not to adopt Adobe Flash technology for iPhone and iPad, which means Steve Jobs and Apple sees Flash as replaceable, instead of a “must-have” technology. Then, even when Apple finally allowed third-party programming tools to be used to develop apps, the news barely registered a blip on CS5 sales.
These are suggestions that Adobe is losing its technology niche--in the tech jungle surrounded by super competitive rivals--and given the still tepid economic recovery, the company seems to lack significant stock boosting catalyst in the near term.
Companies typically find growth either organically or through acquisition. In Adobe’s case, to meet growth target, the shortest route would be the latter, which would weaken its financial position, as noted by WSJ:
"Perhaps compounding investors' concern is the possibility Adobe will resort to using the firm's strong balance sheet on acquisitions to reach its fiscal 2012 revenue target of $5 billion, 30% above this year."
Furthermore, due to the poor earnings outlook, we could see more selling and downward price pressure in the coming trading sessions, as it takes time for some larger funds to unload shares. On a more speculative note, Adobe fits the bill for a M&A target as well, particularly with this new price drop; however, it would be the wrong reason to hold a stock.
Although I don’t typically buy into trend trading, in Adobe’s case, I’d say go with the flow, unless some very compelling catalyst emerges.
Dian L. Chu, Sept. 22, 2010
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Don't they also own some printing platform technology too, oh yeah PDF?
Still some value in this stock, but how much?
I don't think Adobe is losing its edge at all. They're still the behemoth of the graphics industry, largely due to the fact that they've swallowed up any *real* competition they've ever had in the last 10 years, and slapped their name on it. The only product they didn't do that with was Quark, but they've long since won that battle with InDesign -- a truly superior product. However, I've been waiting for this sour bit of news since CS5 was (finally) released, and I'm not at all surprised. The graphic design business has suffered nearly as much as any other outsourced industry, and the advent of cheap stock layouts, artwork and photography has decimated a whole industry of working professionals (freelance or otherwise), and put downward pressure on wages and hourly rates. Working professionals who specialized in one area of the graphics business -- design, versus illustration or photography for instance -- are now required to be fluent in all aspects of the business, regardless of individual talents, due to increased competition and downward compensation. The end result of all of this being mediocrity and homogenization, but that's another matter altogether. Consequently, the extremely high cost of any version of the Creative Suites has made it less and less affordable with every successive version. This, in my estimation, is where Adobe took a wrong turn, especially when they initially implemented Version Cue, which inconvenienced individuals who previously bought their products on an individual basis, making them much more affordable, and allowing people to buy them as they could afford them incrementally. When the economy went south, it made it doubly difficult for people to afford the entire package, but that's how Adobe has chosen to sell its products, and their upgrade prices give the largest incentives to people who buy the entire suite.
Given the global sea change in the industry, I think the Creative Suite is an albatross for Adobe, and will remain so even after the economy begins to recover for the same reasons that any other industry that can now be outsourced for lowest bid. They have the superior products, but they're going to have to rethink how they market them.
Once the 64 bit computers become more mainstream, Adobe will own the markets. Give it 6 more months and the Penryn motherboard of intel will drop 50% in price and Adobe will get a super revival.
Time is money so speed counts and with those machines you need the proper software. CS5 does that trick.
Everybody seems to forget the android market potential for Flash.
But hey, Once a lemming always a lemming right? :)
Adobe is a buy, only morons disagree
Adobe software especially Adobe Reader software is secruity riddled buggy, bloatware, for a bit of software that dispalys a picture and text. Flash player needs constant updates because it is so buggy. Photoshop has gone the same way bloatware. Gimp - a free alternative is pretty good, along with others a little or no cost. Adobe should die!
never did like abobe, hope they go belly up.
http://covert2.wordpress.com
I can't believe the ramp up in AMZN, AAPL, and NFLX. It is so reminiscent of the 1999-2000 internet era. How much media delivery can there be? I mean really
AAPL, a.k.a. the most crowded equity trade in history. 30% OTM puts expiration early 2012 is a certain winner.
You forgot google. That one is just like the yellow pages waiting to be infected with realism
Actually, GOOG is the replacement for the Yellow Pages. As long as there are Yellow Pages, GOOG has market share and revenues to get. It would be a very positive thing if they could figure out something profitable to do with all the cash being generated. Just my opinion, but GOOG is a pretty reasonably priced tech stock.
which shill posted on ZH in the last few days that we should go long Adobe? were they suggesting stocks or was it call options?
stocks are for suckers!!!
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by Sudden Debton Wed, 09/22/2010 - 08:08
#597257
Oh yeah: BUY ADBE OPTIONS 35 2012!! I JUST DID!
It will recover 15% and options will go X3!
"
Hello Fanclub!!!
YES IT WAS ME!! :)
My options are up 15% AS WE SPEAK!
The graphic world just can't do without Adobe. It's like the reserve currency of the world. It is rooted into the system.
You might decide to use something else, but your printer won't.
It'll go up, BECAUSE I SAY SO!!
I love you to guys!
And if you keep seducing me, I MIGHT LET YOU SUCK MY DICK!
PS: Stocks are for people with money Bronzie. That means: NOT YOU!!
Hi SD,
Surely you jest.
That is all.
Being a long time Adobe products user... Adobe is heading downhill in terms of implementation. Acrobat has become a nuisance wanting to always update and monitor program installations. The main product, now CS5, is a load of crap. Changing each year for what improvements? Latest Flash player update has issues that require users to do a system restore to get their workable Flash player back. Putting out defective updates is bad for biz.
Macromedia was a fine company now that Adobe is in control they are ruining the great products Macromedia had.
Where is Adobe Premier? Nowhere........
Adobe's licensing is a joke and a pain.. products overpriced.
So good luck Adobe in a down economy. Get back to your roots and quit bundling crap.
Yin-Yang
I wouldnt bet the farm on Adobe, but a -20% fall ?!? Smells like HTF flash crash, -20% on good news +20% on bad, you just cant trust the market anymore