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Now Isn’t the Time to Panic Out of Adobe Stock

The Monday price action on Wall Street was as wild as it could have been. The indices collapsed 5% early, but then eked out a win at the close. This truly felt like capitulation and for no flagrant reason. There are enough political unrest and economic headline potentials to blame. In reality, this was human emotions playing out in equity prices. A group of stocks stood out with relative strength. Adobe (NASDAQ: ADBE) stock and Roku (NASDAQ:ROKU) rallied 4% to name two.

Adobe (ADBE) logo on wall of corporate building.
Source: r.classen / Shutterstock.com

I mention these two because they have been on investors’ hate list for a while. At its Monday lows, ADBE stock was 31% below its highs from just two months ago.

Clearly, investors can’t make up their minds about Adobe, so let’s de-clutter the outlook. There are good reasons to hold a bullish position in Adobe. But this will also need a bit of help from the indices.

ADBE Stock Is Still Fundamentally Strong

Adobe’s fundamentals are still strong. That’s true despite how poorly the company sold it when it reported earnings. Adobe’s stock fell 15%, suggesting bad marks from management. In reality, revenues and gross profits doubled in four years.

The company achieved this while keeping its expenses in check, since net income almost tripled. Therefore, I can assume that investors panicked because of sentiment rather than facts.

It’s fair to say that there is nothing wrong with Adobe’s business. It’s also fair to say if the stock market is higher in the future, then ADBE stock will also be higher.

The new mantra on Wall Street is a bit dumber than before. It’s like the pros have picked up habits from Reddit Apes. While this is unfortunate, knowing this may give us a leg up as long as we acknowledge this reality.

Investing usually revolves around finding strong companies that are as cheap as possible. The Adobe metrics cited above prove its strength. Don’t believe me? Let’s break it down a bit further.

Its price-to-sales ratio (P/S) is 15x, which is in line with other growth companies. For example, Microsoft’s (NASDAQ:MSFT) P/S ratio is almost 13x. Cloudfare (NYSE:NET), on the other hand, has a P/S of 47.3x. Clearly, ADBE’s valuation fits comfortably near the lower end of the echelon.

Respect the Tape

Adobe (ADBE) Stock Chart Showing Strong Band of Support
Source: Charts by TradingView

Nevertheless, my opinion has not played out in the price action of ADBE stock. The slide from grace has been relentless and brutal. The bears sold every pop without fail. They’ve trapped more bulls along the way.

However, this should change soon because it is reaching support. When a stock falls into a consolidation zone, it tends to find buyers lurking.

In this case, ADBE fell into its base level from last summer. It spent almost nine months trading sideways between $500 and $460 per share. Moreover, it also has a strong volume profile area that translates into support.

As the saying goes, “price is truth.” The zone below $505 has heavy traffic. That suggests heavy interest in Adobe stock. This is the opposite of when they say “overhead resistance” during rallies and at resistance.

So far my message is positive, but this is where I must infuse a bit of skepticism. The markets are still amid the strongest correction in a while, so I must respect it. Investors, regardless of their conviction must leave room for doubt. I must not go all in, nor add to current risk. The goal is to engage with partial longs building up to full positions eventually.

When stocks fall out of control seemingly through no specific fault in their thesis, I nibble. However, the whole small-cap sector has been under severe selling fire for months. The stocks in this group have already shed more than 20% from their highs. Officially this constitutes a recession on Wall Street. I would like to think we can recover quickly, but I don’t demand it. I would rather see an orderly steady rally so we can build a stronger base.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com.

Article printed from InvestorPlace Media, https://investorplace.com/2022/01/now-isnt-the-time-to-panic-out-of-adobe-adbe-stock/.

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