September 21, 2023

Adobe Stock in New Accumulation Phase Amid AI News, Earnings Optimism

The first-quarter earnings season is in the rearview mirror, but there are a number of technology heavyweights on the calendar, including Adobe (ADBE). Adobe shares pushed through the 400 level in heavy volume last month and may be on the brink of a long base breakout that began in mid-August.


Software stocks sold hard on Wednesday, including Adobe, which fell 3.4% in heavy volume. But ADBE remained above its 10-day moving average. Shares rose sharply on Thursday after the company introduced a new platform for its Firefly generative AI model for enterprise customers, where users can generate images from text-based descriptions.

Shares rose again early Friday after Wells Fargo upgraded Adobe stock to overweight with a price target of 525. Mizuho raised ADBE’s price target from 375 to 450.

Oracle (ORCL), meanwhile, continues to show relative strength after breaking out over a 91.22 entry in late March. ORCL stocks have made excellent progress since then, finding support along the way at the 21-day exponential moving average.

Oracle’s results will be announced Monday after the close. Zacks’ consensus estimate is for adjusted earnings of $1.58 per share, up 3% from a year ago. Sales are up 16% to $3.74 billion. That’s on the heels of 18% revenue growth for three consecutive quarters.

Adobe Stock shows bullish action

Adobe’s previous two earnings reports put buyers in the stock. When the company reported results on March 16, shares rose nearly 6% after ADBE reported a 13% increase in quarterly profit, with sales up 9% to $4.66 billion. Sales in the company’s Digital Media segment, which includes Creative Cloud, generated $3.4 billion in revenue, up 9%.

Creative Cloud accounted for the majority of Adobe’s revenue in fiscal 2022, with $11.6 billion in annual recurring revenue.

The results for the quarter ended in May are expected on Thursday after the close. Adjusted earnings are up 13% to $3.78 per share, with revenue up 9% to $4.76 billion.

In September, Adobe announced plans to acquire digital design rival Figma for $20 billion. But the deal is in the crosshairs of regulators, including the US Department of Justice, over antitrust concerns.

Like Oracle, Adobe has a consistent track record of annual earnings growth. But annual earnings are expected to fall 3% this year, with growth set to pick up again at 10% in fiscal 2024.

Outside of the tech sector, homebuilders are on a tear. Within the group results of lennar (LEN) are due on the Wednesday following the close.

Sales growth slowed to a crawl when the company reported results in March, up 5% to $6.5 billion. But deliveries were up 9% to 13,659 homes.

Commenting on the results, CEO Stuart Miller said: “Homebuyers are considering the possibility that the current interest rate environment could become the new normal. Accordingly, the housing market continues to shift as growing family and family formation continues to drive demand against a chronic supply shortage.”

Q2 fiscal profit is expected to fall 51% to $2.32 per share, while revenues are expected to fall 13% to $7.3 billion.

Despite the headwinds in the housing market – namely higher interest rates – Lennar stock continues to respect its 10-week moving average after breaking out of a cup-and-handle basis in April.

Options trading strategy

A basic strategy for trading options around income – using call options – allows you to buy a stock at a predetermined price without taking on much risk. Here’s how the options trading strategy works and what a call option trade looked like recently for Adobe stock.

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First, identify the top-rated stocks with a bullish chart. Some may be settling into a solid base early on. Others may have already broken out and are getting support with their 10-week lines for the first time. And a few might trade tight near highs and refuse to give up much ground. Avoid extensive supplies that are too far past the correct entry points.

In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.

Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a certain price.

You earn a profit when the stock falls below the strike price with a put option.

Check Strike Prices

Once you have identified an income configuration for a call option, check the strike prices on your online trading platform or on Make sure the option is liquid, with a relatively small spread between the bid and ask.

Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying share price at that time. In some cases, an in-the-money strike price is OK, as long as the premium isn’t too expensive.

Choose an expiration date that fits your risk objective, but keep in mind that time is money in the options market. Short term due dates will have cheaper premiums than those further afield. Buying time in the options market incurs higher costs.

See which stocks are in the Leaderboard portfolio

This option trading strategy allows you to benefit from a bullish earnings report without taking too much risk. The risk is equal to the cost of the option. If inventory is less than profit, the most you can lose is the amount paid for the contract.

Trade Adobe Stock options

This is what a recent call option trade looked like for Adobe, a liquid name in the options trading market.

When Adobe shares were trading around 435, an in-the-money monthly call option with a strike price of 435 (expiry June 23) came with a premium of about $1,895 per contract, or nearly 4.4% of the underlying share price at that time.

One contract gave the holder the right to purchase 100 shares of Adobe stock at 435 per share. The most that could be lost was $1,895 – the amount paid for the 100-share contract.

Taking into account the premium paid, Adobe stock would need to rise above 453.95 for the trade to make money (435 strike price plus $18.95 premium per contract).

Keep in mind that this is not a small portfolio trade, as buying 100 shares of Adobe stock would cost $43,500.

Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight.


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