Street Expectations Too High for Adobe

| About: Adobe Systems (ADBE)

Adobe (NASDAQ:ADBE) shares were under pressure Tuesday morning from a research note by Freidman Billings Ramsey analyst David Hilal, who cut his rating on the stock to Underperform from Market Perform.

Hilal notes that since the company announced a revenue mess in early December, the stock has gained 16%, versus 6% for the Nasdaq. He contends the rally is unwarranted, and that “the eye of the economic storm has yet to pass for ADBE.”

Hilal offers three reasons for downgrading the stock:

  • Street expectations are too high despite recent downward estimate revisions.
  • ADBE’s dependence on new unit sales and lack of recurring revenue could put its growth profile among the bottom in the enterprise sector during the downturn.
  • A look back at previous Creative Suite cycles suggests the shares could experience further multiple contraction.

Hilal notes that the company guided to a sequential revenue decline of 7%-13% in the fiscal first quarter ending in February, with fiscla ‘09 seasonality similar to ‘08. But Hilal disagrees: he thinks the earnings seasonality this year will be much different than last year due to the eroding econominc environment.

For the November 2009 fiscal year, he sees revenue of $3.2 billion, down from $3.58 billion in FY 2008. The Street consensus is $3.33 billion. He sees profits for the year falling to $1.70 a share from $2.07 last year; that’s below the Street at $1.80.

ADBE Tuesday was down $1.57, or 6.6%, to $22.19.

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