Adobe shares are up more than 15% so far in 2021, reaching an all-time high on September 3.
ADBE is a juggernaut among cloud-based software stocks
Despite potential short-term volatility in the stock, buy-and-hold investors may view a further short-term decline in ADBE stock as an appropriate entry point
Investors in the cloud-based software heavyweight Adobe Systems (NASDAQ:) have seen their shares rise 15.3% year-to-date and hit a record high (ATH) of $673.88 on September have reached. 3.
But on October 8, ADBE's stock closed at $576.86, losing more than 14% since that record high. The 52-week range for Adobe stock was $420.78-$673.88, while the company's market cap is $274.47 billion.
Headquartered in San Jose, California, Adobe is known for its range of creative software, including Acrobat PDF, Creative Cloud, Photoshop, Illustrator, Lightroom, and Dreamweaver. According to the sales intelligence group Datanyze:
"Adobe Photoshop takes first place for best graphics by market share. Followed by Adobe InDesign and Adobe Illustrator."
The respective market share of each product is 46.48%, 28.62% and 14.76%.
In recent years, many software companies have made the move from simply selling license-based products to software-as-a-service (SaaS) companies that offer subscription models. And Wall Street loves such recurring revenue-based companies.
The 'on demand' software model is cloud-based, with companies like Adobe making their products available to users over the internet. Industrial Research Highlights:
"The global cloud computing market size is expected to reach USD 1,251.09 billion by 2028, growing at a CAGR of 19.1% over the forecast period."
As one of the software names at the forefront of this cloud "digital transformation", ADBE stock is widely followed. Readers may be interested to know that five years ago, in October 2016, Adobe stock would have cost less than $100.
So the compound annual growth rate (CAGR) was almost 42%. In other words, the proverbial $1,000 invested in the company then would be worth more than $5,770 now. Polled by 28 analysts via Investing.com, Adobe stocks have an "outperform" rating.
The stock has a 12-month price target of $703.60, representing an increase of approximately 22% from current levels. The 12 month price range is currently between $560 and $800.
The latest P/E, P/S and P/B ratios for ADBE stocks stand at 47.6x, 18.18x and 19.05x, respectively. In comparison, for another software giant Salesforce.com (NYSE:) are 108.08x, 11.333x and 4.8x. On the other hand, they are 23.57x, 5.32x and 4.23x for Germany-based SAP (NYSE:).
Readers looking at technical charts may be interested to know that a number of ADBE oscillators for the short and medium term are still warning investors. However, the long-term upward trend is still intact.
Meanwhile, October – which has been a seasonally volatile and generally weak month for equities – marks the start of the quarterly earnings season. Adobe is expected to report Q4 and FY2021 statistics on December 16. Therefore, if broader markets and especially technology stocks were to come under pressure in the coming weeks, ADBE stock could potentially fall further.
We expect ADBE stock to slide towards the $550 level, where it is likely to find relatively strong support. The stock would then likely trade sideways as it forms a new base. Buy ADBE stock at current levels
Investors who are not concerned with day-to-day price fluctuations and who believe in the company's long-term potential should consider investing in Adobe stock now.
On October 8, ADBE stock closed at $576.86. Buy-and-hold investors should hold this long position for several months as the stock first attempts to hit the all-time high of $673.88 and bounce back 16.8% from its current level. The next level to watch is the analyst price target of $703.60. Investors can expect to hold this position for several months, if not several quarters.
Readers who plan to invest soon but are concerned about large declines may also consider placing a stop-loss at about 3-5% below their entry point.
2. Buy an ETF with ADBE as the majority shareholder
Many readers are familiar with the fact that we regularly hedge exchange-traded funds (ETFs) that may be suitable are for buy-and-hold investors. So those who don't want to invest capital in Adobe stock but still want substantial exposure to the stock may want to consider looking into a fund that the company holds as a top holding company.
Examples of such ETFs include:
iShares Expanded Tech-Software Sector ETF (NYSE:): This fund is up 14.1% YTD and the weight of the ADBE share is 7.65%;
6 Meridian Quality Growth ETF (SXQG): the fund is up 6.2% since inception and the ADBE share weight is 8.56%;
Invesco NASDAQ Internet ETF (NASDAQ:): Fund is up 6.1% YTD and ADBE stock weight is 7.35%;
SPDR NYSE Technology ETF (NYSE:): The fund is up 12.2% YTD and the ADBE stock weight is 3.00%.
3. Bear Put Spread
Readers who believe that ADBE stocks can make more profit in the short term should consider starting a bear put spread strategy. Because it concerns options, this setup is not suitable for all investors.
It may also be appropriate for long-term Adobe investors to use this strategy in conjunction with their long stocks. The setup would offer some short-term protection against a price drop in the coming weeks.
This trade requires a trader to have one long Adobe put with a higher strike price and one short Adobe put with a lower strike price. Both puts have the same expiration date.
Such a bear put spread would be established at a net depreciation (or net cost). It will benefit if Adobe stock falls in price.
For example, the trader can buy an out-of-the-money (OTM) put option, such as the ADBE January 21, 2022 570 strike put option. This option is currently offered for $30.58. So it would cost the trader $3,058 to own this put option, which expires in about three and a half months.
At the same time, the trader would sell another put option with a lower strike price, such as the ADBE January 21, 2022 550-strike put option. This option is currently offered for $23.05. Thus, the trader would receive $2,305 to sell this put option, which also expires in about four months.
The maximum risk of this trade would be equal to the cost of the put spread (plus commissions). In our example, the maximum loss would be ($30.58 – $23.05) X 100 = $753.00 (plus commissions).
This max loss of $753 can be easily realized if the position is held to maturity and both ADBE puts expire worthless. Both puts expire worthless if the price of the ADBE share on expiration is higher than the strike price of the long put (higher strike price), which is currently $570.
The potential profit from this trade is limited to the difference between the strike prices i.e. ($570.00 – $550.00) X 100) minus the net cost of the spread (i.e. $753.00) plus commissions.
In our example, the difference between the strike prices is $20.00. Therefore, the earning potential is $2,000 – $753 = $1,247.
This trade would cost as much as $562.47 at maturity (excluding brokerage commissions).
