Tuesday, June 26, 2007

Adobe Systems (NASDAQ:ADBE): Conflicting views

We have two firms out with somewhat conflicting views on Adobe Systems (NASDAQ:ADBE) this morning:

- Goldman Sahcs is removing ADBE from their Buy list saying that although they believe the strength in Adobe's CS3 release is likely to sustain its 17% top-line growth rate this year, they do not believe results are likely to end up significantly above this figure and may not meet expectations increasingly focused on upside surprises in future quarters. As a result, the firm is opting for the sidelines, as a trade until later this year when visibility into FY2008 and further acceleration beyond current estimates emerges.

GSCO's current estimates anticipate 32% yoy growth in the August quarter and 23% yoy growth in the November quarter, which is a testament, in their view, to the strongest product cycle in the company's history (with CS3) and ongoing strength in Acrobat/knowledge worker sales. However, shorter term, they do not anticipate a significant upside to these estimates and given the company's premium valuation compared to the overall sector (trading at 25X forward EPS estimate), they believe significant upside to the current stock price remains limited. Maintains $47 tgt.

- Cowen notes trading in software stocks has become more volatile in the last month and Adobe stock has pulled back noticeably since the May quarter report. Sentiment has always played a major part in the stock action and with the stock now more controversial, they believe investors should look to add to positions. While too early to gauge prospects for upside to Street $0.40 EPS estimate (they are $0.43) for the August quarter, they believe set-up looks good. Firm notes strong deferred revenue build during Q2 as well as many specific tailwinds this quarter have the potential to drive upside. Given consensus controversial view after pull-back off CS3 launch quarter report, they believe expectations are properly set to be exceeded. Maintains Outperform.

Notablecalls: Must say I was somewhat surprised to see ADBE pull back so agressively following Q1 results. I was ready to make a fade call after the co reported but held off as most firms were still very positive on the stock. Was looking for couple of bucks worth of downside at the most.

Now, ADBE is down little over 10% from highs. That's after reporting the second-largest increase in deferred revenue ever. There is very little doubt in my mind that ADBE can post some decent upside when it reports in September. This makes it a bounce candidate today following GSCO's call. I expect the stock to gap down and would be looking for a bounce just before it hits the $39 level. That's my ultra s-t view.

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