Adobe Systems (NASDAQ:ADBE) is slated to slip into the earnings confessional after the close of trading this afternoon to release its fourth-quarter and fiscal 2012 earnings figures — options traders might want to set up a play ahead of time.
Wall Street is anticipating a quarterly profit of 57 cents per share, a figure that is down about 15% from year-ago levels.
Back in September, Adobe forecast that fourth-quarter earnings would arrive between 53 and 58 cents per share, placing the consensus estimate near the high end of the company’s range.
Revenue for the quarter is seen arriving at $1.1 billion, versus Adobe’s prior guidance for sales in the $1.075 billion-$1.125 billion range. Year-over-year, the consensus estimate represents a roughly 4% decline.
That said, individual expectations might be higher given Adobe’s current momentum and the company’s reports that customers are adapting to Creative Cloud faster than expected. Specifically, senior vice president David Wadhwani noted in Tuesday’s Creative Now online event that Creative Cloud has attracted more than 1 million users in just seven months — with approximately 326,000 of those being paid subscriptions.
The move from old-school shrink-wrapped box software to cloud services is still seen as a risky move for Adobe. While the monthly subscription cost of $49.99 for the online version of Creative Suite 6 (CS6) is significantly less than the $2,600 price tag for the “offline” version, even the current positive trend in subscriptions is sure to impact Adobe’s current revenue model.
Because of this, many analysts will be keeping a close eye on Adobe’s forward-looking statements for any signs of hiccups in the company’s restructuring.
Investors, meanwhile, appear to have already priced in positive fourth-quarter results for Adobe. Since mid-November, ADBE has soared more than 10% higher, pushing the shares past former resistance at the $34.50 level and toward multi-year high territory.
Click to Enlarge However, this recent surge has left ADBE overbought, with its 14-day RSI currently trending north of 70. Furthermore, the stock is also and staring up at potentially stiff resistance near $36
Over the long-term, ADBE’s fortunes lay with the success or failure of the company’s transition toward the Creative Cloud model. Admittedly, that future looks pretty positive right now. However, the stock’s short-term outlook isn’t quite as rosy.
With a strong fourth-quarter seemingly already baked into the shares, ADBE could be facing a potential “sell on the news” scenario. Even worse, the stock could be pressured by earnings and revenue guidance that falls short of expectations — a likely scenario given the current product transition.
Taking this into consideration, options traders looking to establish a position on ADBE ahead of earnings might want to consider a short-term bear put spread. With overhead resistance near $36 and potential support near $34.50, a December 34/36 bear put spread stands a good chance of realizing a maximum return.
At the close of trading on Wednesday, this spread was offered at 73 cents, or $73 per pair of contracts. Given this entry price, breakeven lies at $35.27 — a decline of about 2% from yesterday’s close — while a maximum profit of $1.27, or $127 per pair of contracts, is possible if ADBE closes at or below $34 when December options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.