I Like Adobe but It’s Not Safe to Grab Some Here, Not Yet Anyway

Daily Updates

Adobe Inc (ADBE) , an old Sarge fave, went to the tape with the firm’s fiscal fourth quarter results on Thursday morning. Adobe posted an adjusted EPS of $2.81, which was not only a beat of industry consensus, but earnings growth of 23%. Adobe also recorded record quarterly revenue of $3.42 billion. This was also a beat, and good for growth of 14.4%, in line with growth reported by the firm for both its fiscal Q2 and fiscal Q3.

I have not been in the name since very early September. No, I did not get the top, but it was a good sale, so I skipped the whole “double bottom” thing, as well as this recent weakness that appears to me to possibly be misplaced. That said, let’s dig in.

Nuts And Bolts

Breaking sales down across business units, the largest segment remains Digital Media. That group experienced 20% sales growth, landing at $2.5 billion for the period. The Creative side of that segment was dominant, contributing $2.08 billion while the Document Cloud pitched in $411 million. Annual Recurring Revenue (ARR) for the entire Digital Media component met consensus view of $10.18 billion.

Now, Adobe is changing how the firm reports results for the Digital Experience segment. From here on out, Publishing and Advertising will be broken out away from the rest of the unit. For this quarter, Digital Experience posted sales of $877 million including Publishing and Advertising. Ex that break-out, Digital Experience lands at $819 million, which is still 10% growth.

Cash flow from operations this quarter ended up at $1.78 billon, a new record for the firm. Remaining Performance Obligations (RPO) exiting the quarter totaled $11.34 billion. Overall, from top to bottom, Adobe, a cloud king in a class with only one or two other names, had an excellent quarter, and is executing at a truly elite level.

But Wait, There’s More….

Let’s take a look at guidance. For the current (fiscal first) quarter, Adobe now sees revenue of $3.75 billion, well above consensus view of $3.36 billion, that would result in adjusted EPS of $2.78 versus the $2.59 that the street is looking for. For the entire coming year, Adobe now guides revenue up to $15.15 billion, above the sell-side view of $14.8 billion. The firm expects those sales to lead adjusted FY 2021 EPS to $11.20, which is up a few pennies from where Wall Street is for the quarter.

Perhaps the street is disappointed with the EPS guide? Perhaps the street is looking to take another pound of flesh on Thursday. Perhaps Adobe is being conservative with guidance on profitability. This is what for me remains unknown.

The firm did announce that its board of directors had authorized an additional $15 billion share repurchase program to run through FY 2024. Adobe bought back a rough 1.6 million shares over the past three months. The previous authorization had been for $8 billion, and is expected to be exhausted at some point during H1 2021.

Dangerous Chart

I see two significant patterns under development. First there is the descending triangle that seems supported at $440. That’s bearish. Then there is the “double bottom” (traced in red) within the triangle that could be bullish, but the pivot is $519, which is now a long way off. On Thursday morning, the shares will test the 50 day SMA at $579. Short-term, this is what matters most. Managers react to the 50 and 200 day lines more so than they do to any other simple or exponential moving averages that my colleagues will throw at you.

The fact is that I like Adobe. Fact is that it is not safe to grab some here. Not yet anyway. Am I willing to take on equity risk at $440? Yes, I think I am. Right now, I can still get paid $0.50 to $0.60 for $440 puts expiring tomorrow. I think I want to write those if I can get someone to buy them. That market is thinly traded. Even more interesting is the $7 to $8 that the market seems to be paying for January 22nd $440 puts… or we could drop down and write the January $400 puts in order to take on less risk for a lesser premium. Remember, ADBE does not pay a dividend, so we don’t need equity to make hay.

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