Technicals Tell: Not the Time to Buy Adobe Systems Incorporated Stock

The corporate progress is there, but ADBE stock isn't quite priced right after the recent, enormous runup

A little over a month ago, yours truly here sang the praises of software maker Adobe Systems Incorporated (NASDAQ:ADBE).

How Investors Need to Approach Adobe Systems Incorporated (ADBE)
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I noted that ADBE was doing things businesses want done with technology but didn’t think were possible. The buzz at the time was riding the debut of Adobe’s programmatic advertising — part of its Experience Cloud suite — though the whole package was what made Adobe compelling.

I still stand by my broad assessment, especially knowing the company is increasingly pairing it with the power of artificial intelligence.

Just for the record though, as much as I like the company’s prospects, I’m not a big fan of ADBE stock right now. I’ve got a nagging feeling a pullback is in the cards, not because the shares responded poorly to a disappointing earnings report, but because it responded poorly to a great fiscal Q4.

Right Stock…

Last week Adobe reported fourth fiscal quarter (ended Dec. 1) earnings of $1.26 per share, which not only topped estimates of $1.16, but were up 40% year-over-year. Sales of $2.01 billion were much better than the year-ago top line of $1.61 billion, and also topped analysts consensus of $1.95 billion.

The current-year outlook is just as exciting. The company is looking for a full-year profit of $5.50 per share, beginning with a Q1 profit of $1.27 per share. Analysts were only looking for first quarter income of $1.24 per share.

Even analysts who aren’t quite bullish on Adobe had to concede the company is doing well. Oppenheimer’s Brian Schwartz, who maintains a ho-hum “Perform” rating on ADBE stock noted: “We view Adobe as a high-quality franchise that is well-managed. We remain positive on its fundamentals and leading market position.” Schwartz added to his commentary, however, “[we] have missed the stock’s run-up and thus remain sidelined on valuation.”

And it’s Schwartz’s willingness to point out reality, coupled with knowing the stock’s forward (2018) P/E of 31.4, that suggests a sizable pullback is brewing.

…Wrong Time

Don’t misread the message. By tech-stock standards, a P/E in the lower 30’s isn’t anything terribly unusual, particularly for a company that’s growing like this one is.

Traders are hot and cold on what’s a palatable valuation though, and with the Trump-driven rally looking like it’s running out of gas and the distinct possibility that the tax reform bill could be a “sell the news” kind of catalyst, the ADBE stock price could be whittled away quite a bit, very soon.

Even the chart of Adobe shares are hinting of a struggle.

Take a look. The knee-jerk reaction to the solid earnings news was bullish (see the arrow), but within a few hours the market had already changed its mind, implying investors were looking for an even more compelling outlook and a stronger earnings beat. The selling effort hasn’t subsided in the meantime either, with ADBE shares knocking on the door of a break below the 50-day moving average line.

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As for where any pullback may finally find a floor, we have to zoom out to a weekly chart to get the right perspective. It’s in this timeframe we can apply Fibonacci retracement lines and see there’s a major floor waiting to be tested around $153.

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The Fibonacci retracement line there isn’t the only curious nuance of $153. That was also a turbulent spot in August and September, and it’s also more or less where the 200-day moving average line will be once Adobe shares have a chance to start testing floor in that area… if a breakdown does end up taking shape.

That’s a very big “if,” of course.

Bottom Line for ADBE Stock

Don’t confuse a short-term bearish concern about ADBE stock with a long-term indictment of the company. This is most definitely only the former. Still, with a potential 12% pullback on the table, the downside risk is a little too great for anyone to ignore.

For what it’s worth, a retreat to $153 sooner than later would translate into a forward (2018) P/E of 27.5 and a 2019 P/E of 22.6. That’s far more in line with market norms.

At the very least, it never hurts to mentally prepare for the worst-case scenario.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

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