Options Trade – Adobe Systems Incorporated (NASDAQ:ADBE) Calls
Sunday, March 16, 2014

**OPTIONS TRADE: Buy the ADBE Jul 2014 75.000 call (ADBE140719C00075000) at or under $1.90, good for the day. Place a protective stop limit at $0.75 and a pre-determined sell at $4.00.

by Ian Harvey

March 16, 2014

Introduction

Adobe Systems Incorporated (NASDAQ: ADBE), a software manufacturer, reports its fiscal first quarter results after the market close March 18. The stock has been a strong performer in 2014, having gained 13.7% year to date. The consensus estimate for the company's first quarter calls is for earnings of 25 cents per share.

The consensus estimate is for the company to report earnings of 25 cents per share, but Wall Street's rumored number is for 27 cents, so that is the number investors really want to see the company report. When the company last reported earnings, it posted Q4 earnings of 32 cents per share, which fell in-line with analyst estimates. The highlight of the report was an indication of how well the company has managed to transition to cloud services, growing its number of cloud subscribers by 1.1 million during its 2013 fiscal year. The downside of the report was that the company issued weaker than expected first quarter guidance. Wall Street overlooked the guidance number and focused instead of its cloud success, resulting in the stock trending steadily higher since the last report. An earnings beat is likely which will send the stock even higher.

Company Details

Adobe Systems Incorporated (Adobe) is a diversified software company. The Company offers a line of software and services used by professionals, marketers, knowledge workers, application developers, enterprises and consumers for creating, managing, delivering, measuring and engaging with content and experiences across multiple operating systems, devices and media.

The Company markets and licenses its software directly to enterprise customers through its sales force and to end users through application stores and its Website at www.adobe.com. Adobe also distributes its products through a network of distributors, value-added resellers (VARs), systems integrators, independent software vendors (ISVs), retailers and original equipment manufacturers (OEMs).

In May 2013, it acquired Ideacodes LLC. In July 2013, the Company announced the completion of acquisition of privately held Neolane.

Key Statistics for ADBE

Current P/E Ratio (ttm) 115.4176
Estimated P/E(11/2014) 59.8308
Relative P/E vs. SPX 6.8089
Earnings Per Share (USD) (ttm) 0.5821
Est. EPS (USD) (11/2014) 1.1230
Est. PEG Ratio 4.9859
Market Cap (M USD) 33,559.18
Shares Outstanding (M) 499.47
30 Day Average Volume 3,774,555
Price/Book (mrq) 4.9585
Price/Sale (ttm) 8.3064
Dividend Indicated Gross Yield -%
Cash Dividend (USD) -
Dividend Ex-Date 04/12/2005
5 Year Dividend Growth -
Next Earnings Announcement 03/18/2014

Technical Analysis

Adobe Systems has a one year low of $40.21 and a one year high of $71.11. The stock has a 50-day moving average of $65.02 and a 200-day moving average of $57.02.

The company has a market cap of $33.488 billion and a P/E ratio of 119.79.

Earnings

Adobe Systems last released its earnings data on Thursday, December 12th. The company reported $0.32 earnings per share (EPS) for the quarter, meeting the consensus estimate of $0.32. The company had revenue of $1.04 billion for the quarter, compared to the consensus estimate of $1.03 billion.

During the same quarter in the previous year, the company posted $0.61 earnings per share. The company’s revenue for the quarter was down 9.7% on a year-over-year basis. Analysts expect that Adobe Systems will post $1.12 EPS for the current fiscal year.

Outlook For Q1FY14 And Beyond

Adobe has guided for revenues of $950 million to $1 billion for the first quarter of fiscal 2014. They indicated GAAP EPS would be in the range of $0.02 to $0.08, and non-GAAP EPS to be between $0.22 and $0.38.

Adobe expects to have nearly 3 million paid Creative Cloud (CC) individual and team subscriptions by the end of fiscal 2014. According to our calculations, this means it will need to add over 30,000 paid users per week in 2014, 40% more than the 2013 weekly subscription rate of 21,000. This would give the company total annual recurring revenue of approximately $1.6 billion from CC. The company has also disclosed that it expects to end the year with over $2.5 billion of Digital Media revenue at a growth rate of 20% year over year. Furthermore, Adobe expects revenues from its digital marketing cloud to grow by 20% year over year. However, it expects the LiveCycle and Connect business to decline further, while the Print and Publishing business is expected to remain flat in 2014.

Analysts Opinions

Research analysts at Jefferies Group increased their price objective on shares of Adobe Systems (NASDAQ:ADBE) from $65.00 to $80.00 in a report released on Thursday, 13th March, 2014. The firm currently has a “buy” rating on the stock. Jefferies Group’s price objective would suggest a potential upside of 17.54% from the company’s current price.

Also, the company has been the subject of a number of research reports:-

• Analysts at UBS AG raised their price target on shares of Adobe Systems from $70.00 to $80.00 in a research note on Wednesday.

• Separately, analysts at Goldman Sachs raised their price target on shares of Adobe Systems from $65.00 to $69.00 in a research note on Thursday, March 6th.

• Finally, analysts at Zacks reiterated a “neutral” rating on shares of Adobe Systems in a research note on Friday, February 28th. They now have a $73.00 price target on the stock.

One equities research analyst has rated the stock with a sell rating, eight have given a hold rating and sixteen have issued a buy rating to the company’s stock. Adobe Systems has a consensus rating of “Buy” and a consensus target price of $61.65.

Conclusion

In this earnings announcement, expect the growth trend in cloud adoption to continue, which will drive revenues for Creative cloud and Acrobat family divisions. Furthermore, expect Adobe’s marketing cloud division to report yet another quarter of growth, buoyed by adoption of its marketing platform.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the ADBE Jul 2014 75.000 call (ADBE140719C00075000) at or under $1.90, good for the day. Place a protective stop limit at $0.75 and a pre-determined sell at $4.00.



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