Christmas Comes Early For Adobe

“Christmas comes early for Adobe”. So said Brent Thill, an analyst at Jeffries, after Adobe (NASDAQ: ADBE) reported their Q4 earnings after the bell last Thursday and it’s not hard to see why. Topline numbers for EPS and revenue both beat expectations with the latter boasting a 22% jump year on year. The team at Jeffries immediately raised its price target from $350 to $370. With shares closing at $306 before earnings were released on Thursday, Wall Street got to work straight away on Friday and had them gapping up 3% to open. They traded upwards of 5% at their high point before going into the weekend up 4%.

Investors will surely be eyeing bottles this weekend that was meant for more festive gatherings later this month but who can blame them. Shares of the $150 billion tech behemoth are up over 40% in 2019 and hit all-time highs on Friday. And with double-digit percentage growth reported across multiple metrics, it doesn’t look like the party is going to stop any time soon.

Transition to the Cloud

It feels like the company’s transition from packaged software to the cloud over the past couple of years has been nothing short of a stunning success. This success is most obvious when we see how subscription revenue, with its attractive recurring nature, now makes up almost all of the company’s sales. Adobe is most well known for its Acrobat PDF software and their Photoshop editing tools. 50% of their new customers came on board via the Creative Cloud package which includes the latter. This shouldn’t be a surprise to investors; we spoke about the bullish potential of the company’s digital media division in this pre-earnings report last week.

For the third-biggest software company in the world, this has been a nimble transition. Oracle and Microsoft, who are the only software companies with bigger market caps, have also pivoted to the cloud in recent years. Gone are the days of customers paying a one-time fee for a licensed CD-ROM package that they could only download once with whatever software version it had. Today’s tech market is made up of cloud-based subscription models that allow customers to access the software on multiple devices with regular fresh updates available to be downloaded.

CEO Shantanu Narayen was unsurprisingly bullish with the numbers and pointed out how "Adobe's phenomenal performance in Q4 capped a record fiscal 2019 with revenue exceeding $11 billion. Adobe’s vision, category leadership, continuous product innovation and large and loyal customer base position us well for 2020 and beyond."

Case for the Bears

With shares poking into blue sky territory, investors will be slow to bet against them. However, the stock took a little wobble after setting fresh highs in July and was down 16% into October before it turned and began it’s 20% march higher to Friday’s close. The first half of this move lower was in line with the broader market as tech cooled off. The second half was driven by a miss with their Q3 report in September that also saw lowered guidance for Q4. Still, though, revenue was also up more than 20% then so there weren’t any signs of fundamental weakness creeping in.

The concern among the bears then and now, however, centers on the company’s ability to maintain the impressive momentum it’s built up and to continue meeting the expectations that Wall Street sets for it. Citi cut the stock from Buy to Neutral after September’s report amid concerns over Adobe’s "ability to continue the financial momentum it has had over the last 5+ years".  Even after last Thursday’s report, Wedbush Securities still questioned the company’s ability to make a success of its $6 billion acquisitions of Magento and Marketo in 2018.

These B2B companies were picked up by Adobe with a view to boosting their digital experience and cloud offerings. To be fair to their new parent, the latest numbers suggest they’re doing everything right.

Technical Analysis

For investors looking to get involved, it feels like a case of ‘no time like the present’. Friday’s close meant the MACD is about to have a bullish crossover which is always an attractive entry point. RSI is just around the 70 mark, so while it’s certainly warm, it’s not too hot. $310 is the first and most important level for bulls to defend but all signs point to current momentum being too strong for the bears to even bring it down to there.