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Adobe Systems (ADBE)
Adobe Stock Falls Despite 41% Profit Increase
Yesterday was probably a pretty confusing day for Adobe Systems executives. In the late afternoon, the company released their second quarter earnings report, which was quite strong, and slightly above analyst expectations. However, investors have not reacted as the company might have expected, and share prices have gone down since the news. Common sense, of course, would predict that share prices would rise after a positive earnings report, but as we can see, the opposite has happened. In cases like this, it is necessary to examine the situation further. What other factors are present which influence investors to sell at a time when a company seems strong?
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The earnings report was undeniably positive. For the second quarter, their profit increased 41% from the year before. Profit increased from $152.5 million (25 cents per share) the year before to $215 million (40 cents per share), a significant change. In regards to revenue, the company was up 19% from the year before, reaching $887 million. Analysts had predicted that Adobe would have revenues around $876-880 million, so the company ended up just slightly beating those expectations.
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In addition, the company has kept a positive attitude about the future, despite the overarching worrisome economic situation. For next quarter, the company expects approximately the same performance as this quarter, with revenues between $855 and $885 million and earnings between 34 and 36 cents per share. This is where some investors and analysts have started to become worried. Surprisingly, sales of Adobe software including Creative Suite 3 (which includes popular programs such as Photoshop and Dreamweaver) have stayed strong, even with a new updated version currently being developed and set to be released later this year. Often, as it gets close to the time of a new software release, sales of the older version will drop off as people decide to wait for the newer one. Some analysts expect to see this trend next quarter, and therefore are more wary about next quarter's performance.
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The larger concern for many investors is how the economy will affect the company, despite the company's optimism. Adobe is able to do a lot of business overseas, but United States sales traditionally make up about 50% of the company's revenue. In recent years, however, U.S. sales have dropped to 44% of the company's total revenue, and growth has virtually halted. The company's 19% increase in sales was made possible by growth in Europe (40% increase) and Asia (38% increase), but hurt by the negligible 0.1% growth in the United States. Adobe Systems is counting on U.S. sales to increase with the new release of Creative Suites (as well as with Adobe Acrobat 9.0), but this isn't something they can be 100% sure of if the economic situation doesn't start to improve.
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One of Adobe's Chief Executives pointed out that Adobe's products are "productivity tools" which are beneficial for many businesses and employees. As they are not "luxury items", they might be able to avoid being impacted by a recession as much as some other non-essential items. On the other hand, there really isn't any way to be sure of that. If times are hard, people or companies sometimes need to cut back on even the essential items. Adobe may believe they are being cautious by estimating an equivalent performance for next quarter, but investors seem to believe that the company isn't being cautious enough. The company may have done well this quarter, but these investors seem to be done thinking about the past, and are now speculating about the future.
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