Adobe (ADBE) Perfectly Positioned for New Highs

Adobe Inc. (ADBE) reports fourth quarter 2020 earnings after Wednesday's closing bell, with analysts expecting a profit of $2.66 per share on $3.36 billion in revenue. If met, earnings per share (EPS) will mark a 16% profit increase compared to the same quarter in 2019. The stock fell more than 4% after posting strong third quarter results in September and is now trading just above that price level, yielding a 0% quarterly return.

Key Takeaways

  • Adobe stock posted an all-time high in early September and eased into a bull flag correction.
  • A key acquisition during the quarter should underpin 2021 profits and revenue.
  • Accumulation is surging ahead of Wednesday’s earnings report, raising the odds for a breakout.

The tenth highest-capitalized Nasdaq-100 component hit an all-time high with other tech stocks in September and eased into a correction that has unfolded mostly through time rather than price. It has carved a shallow bull flag pattern during this period, crisscrossing the 50-day exponential moving average (EMA) repeatedly. Accumulation readings have surged to new highs, while price is pushing against flag resistance, perfectly positioned to a break out in reaction to a strong report.

A few big investors trimmed exposure during the quarter, with hedge funds run by Keith Meister and Dan Loeb decreasing position size. The acquisition of Workfront for $1.5 billion marked the biggest news since the last report, adding a collaboration tool that will work in conjunction with Adobe's Experience Cloud product line. The company hopes that the new resource will boost sales of that division's marketing, advertising, and analytics software.

Wall Street consensus on Adobe stock is nearly pristine, with a "Strong Buy" rating based upon 16 "Buy," 3 "Hold," and 0 "Sell" recommendations. Price targets currently range from a low of $500 to a Street-high $600, while the stock is set to open Tuesday's session nearly $68 below the median $560 target. This humble placement should support healthy upside if the company exceeds earnings expectations and issues bullish guidance.

Hedge funds are alternative investments using pooled funds that employ different strategies to earn active returns, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

Adobe Weekly Chart (2013 – 2020)

Chart showing the share price performance of Adobe Inc. (ADBE)

Adobe stock finally cleared resistance at the 2000 high in the mid-$40s in 2013, entering a channeled advance that accelerated in a rare channel breakout in 2017. Buying interest faded near $275 in the fourth quarter of 2018, giving way to a decline that found support near $205 at year end. Buyers returned in 2019, triggering a June breakout that mounted $300. It posted another new high in February 2020 and turned sharply lower into March, hitting a 52-week low at $255.

The subsequent recovery wave completed a round trip into the first quarter high at $387 in May and broke out, posting strong returns into the Sept. 2 all-time high at $537. The downturn into December has carved slightly lower highs and lows, typical of a bull flag pattern that eventually yields new highs. Even so, flags often post five waves instead of three, raising the potential for another lower low, perhaps near the 50-week EMA at $425.

Buying interest has picked up considerably since the Thanksgiving holiday, with steady accumulation as registered by the on-balance volume (OBV) accumulation-distribution indicator. This uptick, ahead of earnings, suggests that funds and institutions are quietly getting on board, expecting higher prices. OBV is parroting this bullish theme by lifting to an all-time high, predicting that price will soon follow.

A trading channel is drawn using parallel trendlines to connect a security's support and resistance levels within which it currently trades. A trading channel may also be known as a price channel.

The Bottom Line

Adobe stock is well positioned for higher prices following this week's fourth quarter 2020 earnings report.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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