Expectations are running high for business software specialist Adobe Systems (ADBE) as the company prepares to enter the earnings confessional after the close of trading Tuesday afternoon. But with short-term caution growing on Wall Street, and Adobe stock trading near all-time highs, will ADBE’s report hold enough upside promise for bullish investors?
Digging into the numbers, Wall Street is expecting Adobe earnings of 26 cents per share in the third quarter, with revenue seen rising 1.9% to $1.01 billion. Adobe’s transition to the cloud also will be under heavy scrutiny, as analysts look for Creative Cloud subscriptions to rise by 497,000 to roughly 2.8 million.
That said, some on Wall Street might have set their sights higher.
According to EarningsWhisper.com, the whisper number for Adobe earnings comes in at 28 cents per share, 2 cents higher than the consensus. This might not be a bad bet, however, as the company has topped the consensus estimate in five of the past eight quarters, according to Zacks data.
Taking a closer look at the brokerage bunch, we find a wellspring of bullish sentiment. Specifically, Thompson/First Call data reveals that 13 of the 19 analysts following ADBE stock rate the shares a “buy” or better, with nary a “sell” rating to be found. Additionally, the 12-month price target of $80 represents a modest premium of about 13% to Friday’s close at $70.98, leaving a little wiggle room for potential price-target increases.
Optimism also is prevalent on the options front. Taking a look at the front two months, calls are easily more popular than puts, with the put/call open interest ratio arriving at 0.69. Peak call open interest totals 2,760 contracts at the weekly Sep $75 strike, while another 1,307 contracts reside at the Sep $72.50 strike. On the put side, the Sep $67.50 strike sports open interest of 1,759 contracts, while peak put open interest of 2,800 contracts lies at the Oct $70 strike.
Click to Enlarge Overall, weekly September implieds are pricing in a potential post-earnings move of about 5.5%. This places the upper bound near $73.86, while the lower bound lies at $66.14.
As such, an upside move still leaves ADBE lingering below resistance at $74, while a downside move would send the stock reeling toward support in the $66 region.
Options Trade on Adobe Stock
Those traders looking to join the bullish bandwagon ahead of Adobe earnings might want to consider an Oct $70/$75 bull call spread.
This spread was last offered at $1.90, or $190 per pair of contracts. Breakeven lies at $71.90, while a maximum profit of $3.10, or $310 per pair of contracts, is possible if Adobe stock closes at or above $75 when October options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
