On Tuesday, software company Adobe Systems (NASDAQ:ADBE) reports earnings for the quarter ending Aug. 31, 2011. With shares down nearly 30% since the end of April, investors are skeptical about the company’s performance in the current quarter.
Technology shares in general have stumbled since the beginning of the summer. Concerns about an economic slowdown and a double-dip recession have investors questioning future performance at Adobe. When the company reported results for the period ending May 31, 2011, it included guidance for the current quarter that was too pessimistic for some.
The stock lost 6% of its value the trading day after that report was released despite the company beating analyst estimates for the quarter. And that was only the beginning. Since July 1, Adobe has lost 19% of its value. Has the selling gone too far?
It would appear most of the bad news already is priced into the stock. Adobe said it expected earnings to fall in a range of 50 to 56 cents per share. Analyst estimates at the time were at 54 cents per share. The average estimate has not changed since, but given the reaction in the market, one would expect estimates to be a bit lower.
During the past year, the company has exceeded estimates:
For the full year ending Nov. 30, 2011, the average Wall Street estimate for profits is $2.26 per share. That number increases by 12% the following year to $2.54 per share. At current prices, shares of Adobe trade for 11 times current fiscal-year estimates.
Shares of Adobe fell Friday thanks to a rating downgrade by JMP Securities. The analyst performed a so-called channel check of supposed customers of the company that suggested sales might be less than expected in the current period. The analyst cut profit growth forecasts for the current year to 8%.
Before the summer swoon, however, Adobe shares actually were performing nicely:
JMP’s recent downgrade of the stock is disconcerting. The saving grace might be its Flash product. The long-running dispute with Apple (NASDAQ:AAPL) has hurt the perception of the company, but with strong performance by Google (NASDAQ:GOOG) Android-based systems — as well as an end-around that could let Flash-based content stream onto iOS-based products — that segment of the company might surprise this quarter.
From a technical standpoint, shares of Adobe have been forming a base of support at $24 per share. From a fundamental standpoint, shares are reasonably priced.
If the news is not as bad as investors currently selling the stock predict, Adobe might have room to run. Of course, that is a big “if” in this environment. I would look to find better money-making opportunities elsewhere.
