Like many software stocks, Adobe (ticker: ADBE) has had a very tough couple of months. Since peaking at $688.37 on Nov. 19, the stock has slid 24%, even worse than the
iShares Expanded Tech-Software Sector
ETF’s (IGV) 19% drop over the same period. Some of the decline is simply a result of shifting sentiment—the prospect of rate hikes has a way of making investors reconsider stocks with high valuations—but Adobe’s pain has been well earned.
While the stock had a stellar run after the pandemic—more than doubling off its March 2020 low—shares had already peaked when Adobe released fiscal-fourth-quarter earnings on Dec. 16. It reported a profit of $3.20 a share, meeting forecasts, but offered guidance for a first-quarter profit of $3.35, below estimates for $3.38. The stock fell 8.5% and has been falling ever since.
Now the stock has a chance to arrest its decline. At $520.60 a share, it is sitting near its 100-week moving average of about $500. That has served as support for the past nine years, notes Evercore ISI technical analyst Rich Ross. And Adobe’s relative strength index—a measure of whether a stock is overbought or oversold—fell to 34 early in the week, its most oversold level since 2011. Together, they could combine to push the stock higher.
This is the part where we’d like to point out all of the fundamental reasons why Adobe stock looks like a buy. Unfortunately, that’s not easy to do. Its earnings were disappointing enough to allow doubt to creep in, not good for a stock that still trades at 36.7 times earnings. And Adobe isn’t set to report earnings until March 22, so there isn’t much to focus on except the trading—and the fact that an RBC survey showed that it was one of the most popular shorts.
Even the bulls seem rather subdued. After the miss, Evercore analyst Kirk Materne, who rates the stock Outperform, noted that Adobe missed on digital-media annualized recurring revenue, making it easy to argue that it either faced heightened pressure from smaller competitors or that Covid had boosted growth in 2020 and 2021, and was unlikely to do so going forward. Yet much of the guidance miss was due to a stronger dollar and an extra week, not any meaningful slowdown, Materne writes, though he acknowledged that the stock could face some tough times, at least in the near term. “Until the business gets back into beat/raise mode, we expect the shares are likely to remain in a bit of a trading range,” he wrote.
Investors won’t get any real answers until Adobe reports earnings in March, but that hasn’t stopped them from trying to game it out. For instance, Jefferies analyst Brent Thill noted that an unnamed system integrator had its best December ever, and continued to forecast about 20% growth for calendar-year 2022, faster than the 14% Digital Experience growth that Adobe forecast. It’s anecdotal, but it suggests that maybe Adobe can still turn things around. “ADBE is still a quality, large-cap growth story,” Thill writes.
Still, we’ll be watching that 100-week moving average. If it breaks, all bets are off.
Write to Ben Levisohn at Ben.Levisohn@barrons.com