When Will Adobe's Earnings Resume Growth?

| About: Adobe Systems (ADBE)

Adobe Inc. (NASDAQ:ADBE) is set to report FQ1 2014 earnings after the market closes on Tuesday, March 18th. Adobe is an American multinational software company known for its multimedia and creative software products. Adobe’s earnings have stalled over the past year as the company has not posted year-over-year earnings growth in any of the past 5 quarters. However, analysts from UBS, Jefferies, and Susquehanna have all issued bullish price targets on Adobe ahead of the company’s FQ1 earnings release. This quarter, Wall Street is estimating that Adobe’s sales will fall nearly 2% compared to FQ1 last year. On the positive side, Creative Cloud subscriber sales are expected to continually increase and hit a tipping point sometime in mid-2014, which is when professional analysts are expecting Adobe to resume year-over-year revenue growth. Here’s what investors are expecting from Adobe on Tuesday.

The information below is derived from data submitted to the Estimize.com platform by a set of Buy Side and Independent analyst contributors.

(Click Here to see Estimates and Interactive Features for Adobe)

The current Wall Street consensus expectation is for Adobe to report 25c EPS and $970.93M revenue, while the current Estimize.com consensus from 14 Buy Side and Independent contributing analysts is 26c EPS and $927.29M in revenue. This quarter, the buy-side as represented by the Estimize.com community is expecting Adobe to beat the Wall Street consensus on both EPS and revenue by a small margin.

Over the past 4 quarters, the consensus from Estimize.com has been more accurate than Wall Street in forecasting Adobe’s EPS and revenue 4 and 3 times, respectively. By tapping into a wider range of contributors including hedge-fund analysts, asset managers, independent research shops, students, and non-professional investors Estimize has created a data set that is more accurate than Wall Street up to 69.5% of the time, but more importantly, it does a better job of representing the market’s actual expectations. It has been confirmed by an independent academic study from Rice University that stock prices tend to react with a more strongly associated degree to the expectation benchmark from Estimize than from the Wall Street consensus.

The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case, we are seeing a smaller than usual difference between the 2 groups’ expectations.image

The distribution of estimates published by analysts on the Estimize.com platform range from 25c to 27c EPS and from $960.93M to $974.93M in revenues. This quarter, we’re seeing a narrower than usual distribution of estimates on Adobe.

The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A narrower distribution of estimates signaling more agreement in the market, which could mean less volatility post earnings. image

Over the past 4 months, the Wall Street EPS consensus fell from 33c to 25c, while the Estimize consensus inched higher from 25c to 26c. Meanwhile, the Wall Street revenue forecast dropped from $1.012B to $970.93M, while the Estimize forecast increased late in the period from $968.64M to $972.29M. Timeliness is correlated with accuracy and rising Estimize analyst revisions at the end of the quarter are often a bullish indicator.image

The analyst with the highest estimate confidence rating this quarter is TheEmulator23, who projects 26c EPS and $973.23M in revenue. In the Winter 2014 season, TheEmulator23 is rated as the 11th best analyst and is ranked 22nd overall among over 3,950 contributing analysts. This season, TheEmulator23 has been more accurate than the Street in forecasting EPS and revenue 61% and 55% of the time, respectively. Estimate confidence ratings are calculated through algorithms developed by deep quantitative research, which looks at correlations between analyst track records and tendencies as they relate to future accuracy. In this case, TheEmulator23 is making a bullish call expecting Adobe to report in-line with the Estimize community’s expectations on EPS while beating forecasts on revenue.

This quarter, contributing analysts on the Estimize.com platform are expecting Adobe to beat Wall Street’s expectations on both the top and bottom line by a thin margin. Adobe hasn’t reported year-over-year EPS or revenue growth in any of the past 5 quarters. While Adobe is not expected to report yoy growth this quarter either, analysts believe by mid-2014 Adobe’s fundamentals should be moving in the right direction again.

Disclosure: None