High Expectations Ahead of Adobe (ADBE) Report

Adobe Inc. (ADBE) reports third quarter earnings after Tuesday's closing bell, with analysts expecting the company to post earnings per share (EPS) of $2.40 on $3.16 billion in revenue. The stock rose 4.9% despite missing second quarter revenue estimates and lowering third quarter EPS guidance in June, but it posted a healthy series of new highs into early September. It has fallen about 12% since that time, caught in the broad-based big tech downdraft.

Key Takeaways

  • Adobe is set to report third quarter earnings and revenue in Tuesday's post-market.
  • The stock has risen more than 60% so far in 2020.
  • Relative strength is waning into the news, raising the odds for an intermediate correction.

The software giant has posted outsized 2020 returns so far, like many other big tech components, lifting more than 60% into the September peak. The pullback since that time is close to setting off a long-term sell signal, but a blowout quarter and bullish fourth quarter guidance could save the day. Even so, risk will be elevated into this week's confessional, telling complacent shareholders to consider tightening up stops and taking partial profits.

Big investors have grown more cautious about Adobe's long-term outlook in recent months, with Stanley Druckenmiller's Duquesne Capital, David Tepper's Appaloosa Management, and Keith Meister's Corvex Management disclosing newly closed or reduced positions in August filings. Dan Loeb's Third Point is an exception to this exodus, maintaining but not adding to an open position of around 670,000 shares.

Just nine analysts follow the Nasdaq 100 component, with a consensus "Strong Buy" rating based upon seven "Buy" and two "Hold" recommendations. Price targets currently range from a low of $413 to a Street-high $570, while the stock is set to open the new trading week about $20 below the median $502 target. There's plenty of potential upside in this configuration, but it may not be enough to generate a breakout to new highs.

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Adobe Long-Term Chart (2013 – 2020)

Long-term chart showing the share price performance of Adobe Inc. (ADBE)

Adobe broke out above the 2007 high in the upper $40s in 2013 and entered a channeled advance that accelerated following the 2016 presidential election. The uptick stalled in the third quarter of 2018, yielding a steep pullback, followed by unusually weak 2019 performance. Buyers finally returned in December, triggering a strong rally wave up to $387, ahead of a pandemic swoon that relinquished more than 130 points into March. 

The stock completed a 100% retracement into the first quarter high in May and broke out in June, adding 150 points into September's all-time high at $536.88. The subsequent decline landed on 50-day exponential moving average (EMA) support last week and held that level into the weekend, raising the odds for a bounce that may have begun on Monday. This impulse will face resistance above $500, lowering confidence about upside potential, even if the company reports strong quarterly results.

The monthly stochastic oscillator entered a bull cycle from a higher low in April, reaching the overbought zone in June. Weak price action in the past two weeks has generated a bearish crossover that won't issue a sell signal until the blue signal line stretches below the horizontal overbought line. A negative earnings reaction could complete the bearish task, but as you'll note from prior years, the indicator can oscillate sideways for long periods.

Overbought is a term used when a security is believed to be trading at a level currently above its intrinsic or fair value. Overbought generally describes recent or short-term movement in the price of the security and reflects an expectation that the market will correct the price in the near future.

The Bottom Line

Adobe stock is extremely overbought after booking impressive 2020 returns, increasing downside risk into this week's earnings report, but blowout third quarter metrics could save the day.

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

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