Seeking Alpha
Profile| Send Message|
( followers)  
A week ago, we were crowing about our seemingly timely move into Adobe (NASDAQ:ADBE) call options. We neglected to recognize a fifth possibility: that the market would anticipate a less-than-expected guidance reduction, such that when the “expected” reduction was announced, it was a disappointment after all.

The endlessly recursive logic loops that are occasionally indulged (I think the market expects A, but I think it’s more likely to be B, but what if the market really expects B and it turns out to be A?) are probably best avoided altogether.

That said, it doesn’t change our original thesis a bit. We bought January 2007 calls, not June 2006, and there is no reason to pay an extra time premium unless, well, you aren’t sure of the timing. While it looked earlier this week to be fulfilling our expectations quickly, we are still willing to wait it out.

So what was our thesis?

1. The valuation was at the low end of its historic range.

2. An upgrade cycle is looming.

3. It didn’t hurt that expectations appeared to be bottoming (which was the bad call).

Does last night’s report change anything?

According to CNN Money,

Adobe also lowered its full-year 2006 profit and revenue forecasts due to weaker demand for its content-creation products such as Photoshop, as customers wait for new versions that work with new Apple computers.

Like we said, the product cycle is looming. Not underway. Recent history (last five years) the stock has reached its peak valuation when a new product is launched, so the time to buy is usually ahead of that. As Forbes reported yesterday,

While he admitted the second quarter was “challenging,” [Adobe Chief Executive Officer and Director Bruce] Chizen expressed confidence in the company and said he was “excited about the future.” No doubt he was referring to more than just Adobe/Macromedia Creative Suite 3 bundles.

And we are excited about it too. It is the first Creative Suite bundle that will run on the new Intel-based Macs, which are the instrument of choice for many of Adobe’s customers. The availability of Creative Suite could actually spur a massive upgrade cycle for both Adobe and Apple (NASDAQ:AAPL).

The valuation has also not changed. In fact, the after-hours selloff has basically just erased some recursive-logical optimism from earlier in the week.

So we’re sticking to our guns.

Disclosure: The author is still long Adobe call options with a $30 strike price and January, 2007 expiration.

ADBE 1-yr chart:

ADBE 1-yr

Source: Why We're Sticking to Our Guns With Adobe Systems Despite Yesterday's Earnings Disappointment (ADBE)