Option Trade 
Adobe Systems Incorporated (NASDAQ:ADBE) Calls
 Tuesday, March 14, 2017

** OPTION TRADE: Buy the ADBE APRIL 21 2017 125.000 call at approximately $2.20. Place a pre-determined sell at $4.40.

Note: No protective stop losses added -- but if you wish to do so make it $0.90.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

Software manufacturer, Adobe Systems Incorporated (NASDAQ:ADBE), shares its fiscal first-quarter results after the closing bell on Thursday; analysts on average predict it will post $0.87 per share in earnings. That compares to the $0.90 per share in the prior quarter and $0.66 a year ago. And the $1.65 billion in expected revenue would be up about 19 percent year over year. Note that earnings per share topped consensus estimates by at least 4 percent in the previous four quarters.

The forecast is about the same on the bottom line, with EPS expected to come in at $0.88. That would be the second highest level in the past two years. And the consensus revenue estimate for the three months that ended in February is also $1.65 billion.

Adobe has trended sharply higher over the last three months, with the stock currently trading just shy of its all-time high.

The company is coming off a very strong fourth-quarter report in December, with the company posting record revenue figures that were above the consensus estimate. The company has stopped disclosing subscriber numbers for its Creative Cloud, but last quarter it did note that Creative Cloud revenue was up 33% year over year, while its Marketing Cloud revenue rose 32%. Adobe has a stellar track record when it comes to earnings reports, with 13 straight quarterly beats.

There is still plenty of upside potential for the company.

ADBE shares have gained 16.8% on the year.

Adobe Systems Incorporated has a 50-day moving average of $117.24 and a 200 day moving average of $108.53. The company has a market capitalization of $60.18 billion, a P/E ratio of 52.50 and a beta of 1.06. Adobe Systems Incorporated has a 52-week low of $86.22 and a 52-week high of $121.96.

Influencing Factors to Consider               

The company is benefitting from the shift from an installed software business model to a cloud subscription.

On Dec. 16, Adobe completed the acquisition of TubeMogul for $540 million -- and held a call with the investor community to explain its rationale for the merger and to update guidance.

TubeMogul enables brands and ad agencies to plan and buy video advertising across desktops, mobile devices, streaming devices and televisions. The deal creates an end-to-end advertising and data management solution that spans the whole world of television and digital screens. Adobe plans to integrate its Adobe Audience Manager technology into the product, which will allow marketers to unify audience planning and media buying.

Adobe's Market Cloud delivers planning and delivery of search, as well as display and social advertising, commonly referred to as direct-response media. Combining the Adobe Market Cloud, Audience Manager and TubeMogul creates a single platform across search, display, desktop, mobile, streaming and television. Ad agencies can buy ads on each platform and get detailed statistics on their ad performance all in one place.

Management believes the addressable market for this product is more than $7 billion by 2019.

Adobe believes TubeMogul will add approximately $19 million in revenue in the company's first quarter and approximately $140 million of revenue by fiscal 2017 year end.

Adobe's Market Cloud business could grow 24% in the first quarter, up from the 20% estimate given in December. Similarly, the company believes it can grow 25% in 2017. The TubeMogul deal presents a great growth opportunity.

Adobe will have several businesses growing double digits this year. Digital Media is expected to be up 22% and Digital Market is expected to be up 24%. Adobe's Print and Publishing business is the only (relatively) slow-growth business -- up just 9.5%.

On top of the double-digit revenue growth, these businesses are quite profitable. Adobe has a gross margin of 86% to 87%. The company is estimated to end the first quarter with an operating margin of 30% and something close to 27% by year end. Adobe is printing money faster than the Fed.

If the TubeMogul deal works out as expected, earnings will easily grow 25% -- and that means Adobe shares can keep going higher. Right now, analysts are thinking the company can earn $3.82 a share in fiscal 2017 and $4.79 next year, but those estimates could be low, especially next year's estimate. Once the company fully integrates the TubeMogul technology into its existing platforms, revenue growth should really take off.

In digital media, Adobe stands to benefit from customers shifting from legacy software to Adobe's cloud subscription services.

After its first-quarter earnings report, the company will host its five-day Adobe Summit digital marketing conference in Las Vegas starting March 19. Adobe plans to make Adobe Marketing Cloud announcements related to advertising, content marketing, and artificial intelligence.

Analysts and Hedge Funds Opinions

Cowen & Co. analysts J. Derrick Wood and Rakesh Kumar reiterated an Outperform rating and raised their price target by $20, to $140 on Friday, writing that they expect steady growth execution from Adobe, and are optimistic about the health of its growth vectors in both Digital Media and Digital Marketing.

Wood said he expects a solid first-quarter report from Adobe next week.

"We expect steady growth execution and remain bullish around the health of its growth vectors in both Digital Media and Digital Marketing," he said in a report. "Our checks indicate that large enterprises still carry a high priority for new innovative investments in digital marketing technologies, and we believe Adobe remains a key strategic vendor in the space."

They expect first-quarter revenue to climb 19% year over year to $1.65 billion, yielding earnings per share of 88 cents, just above consensus estimates on both counts. They estimate operating margins will come in at 35% and operating cash flow at $471 million.

Harvey’s Options Volatility Indicator


Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the ADBE APRIL 21 2017 125.000 put at approximately $2.20. Place a pre-determined sell at $4.40.

Note: No protective stop losses added -- but if you wish to do so make it $0.90.

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Options traders win because they are successful.

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