Will Recent News Hurt Adobe?

With shares of Adobe (NASDAQ:ADBE) trading around $54, is ADBE an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Adobe operates as a diversified software company worldwide. It offers a line of software and services used by creative professionals, marketers, knowledge workers, application developers, enterprises, and consumers. Adobe markets and licenses its software directly to enterprise customers through its sales force and to end-users through application stores and its website. Software products and platforms are seeing an increased adoption rate worldwide by consumers and businesses who are seeing increased technology exposure. The efficiency and ease offered by Adobe products make it a viable option to many.

Adobe’s recent security breach is looking much worse than what was reported last month. According to the Sophos Naked Security blog, information on 150 million Adobe customers has turned up on a website frequently used by hackers and other cyber criminals. The blog said this could end up being one of the worst security breaches in online history, according to The Verge. Adobe stands by the 38 million figure that it gave last month, while Sophos is accusing the company of inadequately encrypting its data.

T = Technicals on the Stock Chart are Strong

Adobe stock has been on a strong move towards higher prices in the last couple of years. The stock is currently trading near all time high prices, but it may need time to digest these levels. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Adobe is trading above its rising key averages which signal neutral to bullish price action in the near-term.

ADBE

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Adobe options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Adobe Options

35.97%

93%

90%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

December Options

Flat

Average

January Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Adobe’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Adobe look like and more importantly, how did the markets like these numbers?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-44.83%

-66.67%

-64.86%

26.03%

Revenue Growth (Y-O-Y)

-7.92%

-10.13%

-3.57%

0.11%

Earnings Reaction

9.22%

5.58%

4.19%

5.7%

Adobe has seen decreasing earnings and revenue figures over the last four quarters. From these numbers, the markets haven’t been too pleased with Adobe’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Adobe stock done relative to its peers, Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL), and sector?

Adobe

Apple

Microsoft

Oracle

Sector

Year-to-Date Return

44.21%

-2.30%

40.62%

2.70%

22.30%

Adobe has been a relative performance leader, year-to-date.

Conclusion

Adobe provides valuable software products and services to a wide range of companies and consumers operating in diversified industries worldwide. The company is looking much worse than what was reported last month. The stock has been trending higher in recent years and is currently trading near all time high prices. Over the last four quarters, earnings and revenues have been decreasing, leaving investors unhappy about the company. Relative to its peers and sector, Adobe has been a year-to-date performance leader. WAIT AND SEE what Adobe does next.

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