There are a few key factors which drove me to feature Adobe (NASDAQ:ADBE) as the stock of the week this week. Each one of these factors are described in the analysis below. The first factor is the expected product cycle of CS3 and the associated expected earnings recovery in '07; this includes the beta release from Friday. The second is the corresponding analytical comments stemming from Wall Street post Q3 results. Finally I will address momentum and the Technical Indicators associated with the stock.
Creative Solutions 3 will officially be launched in Q2 '07. The English version is expected to be available in the second quarter and the rest of the languages will be available in the third quarter of 2007. It's all about product cycles at Adobe this time. Thus far earnings at the company have been driven primarily by their recently acquired programming arm, Macromedia. But analysts want and expect more from the company. Wall Street is looking for EPS figures in 2007 at or about $1.55. This includes some revenues from CS3. However, these estimates also suggest that the timing of the product rollout is critical to Adobe's ability to meet those expectations. Even a slight delay will be detrimental. Thus far no such delay is expected and there are no reasons to suggest that, but this risk-factor should be understood before entering any ADBE trade going forward. With that, Wall Street expects earnings in '08 to be about $1.89. According to these figures, ADBE shares are trading at 28x '07 and 22x '08 figures at current levels. This has raised some eyebrows.
Wall Street Comments
Even with valuation concerns lingering Wall Street analysts are still increasing their respective price targets for the stock. This has added to already established momentum. The increase in ADBE on Friday directly reflects Wall Street's expectations. RBC Capital and Prudential each raised their price targets and Oppenheiner and Jeffries had positive things to say about the results and the future projections with respect to '07 EPS expectations from the company. Wall Street has developed a positive slant on ADBE which hinges on the CS3 rollout. Right now, no one doubts the profitability potential of the product, and the stock reflects that perception.
With that, the beta version, which was released on Friday, will like stir a few pots this week as well. I am expecting comments and product descriptions to foster continued interest in ADBE after Friday's strength. That should add a little more fuel to the fire and I expect the stock to eventually move higher as a result. But maybe not initially.
Technical Indicators and Momentum
Technical indicators this year were negative until the beginning of August. At that time the technical indicators for ADBE switched from negative to positive. The stock also began to cycle higher at that time. Since the reversal that occurred in early August the stock has had positive momentum; there are no reasons to expect that momentum to subside quite yet. In fact, the stock is likely to continue to cycle higher from current levels until such time as longer term resistance is tested again. I have defined longer term resistance as longer term parameter #3 in my trading report for ADBE.
The Technical indicators suggest that the stock is preparing to test longer term resistance; there is a little more room for the stock to move higher before an official test occurs. After a test of longer term resistance occurs I expect the stock to stall and turn lower again.
The positive comments from Wall Street and the street talk about the beta version of CS3 will almost surely add to the attention paid to ADBE in the coming week. However, given the existing concerns about valuation and built-in expectations, the stock is likely to pullback in the beginning of the week before it turns higher. I expect ADBE to test converted mid term support today or tomorrow. After that test occurs [after the dip] I expect the stock to turn higher again and test longer term resistance officially. After that happens I expect ADBE to turn lower again as it oscillates back towards $30.43. Therefore, longer term resistance could also be used as a sell/short signal for longer term traders.