Market Overview

Adobe to Go "Sideways," Investors Should "Avoid the Stock"


“The data points on ADBE [are] not good,” says Global Equities Research.

In a Q&A update on all things Adobe (NASDAQ: ADBE), Trip Chowdhry, the research firm's Managing Director of Equity Research, is providing some comments to address the questions he has received.

“[Adobe's] fundamentals are getting weaker,” Chowdhry said. “[The] Flash franchise is on [the] decline. All the tablets that touted Flash support have failed to gain market traction – they include [the] Motorola (NYSE: MMI) XOOM and HP's (NYSE: HPQ) [TouchPad]. Further, the momentum on HTML 5 is irreversible...Flash will be a slow declining business. Investors should not factor in any rebound in [the] Flash business.”

And that's not all investors should worry about. “Momentum on mid-cycle release of CS5.5 is just lukewarm,” Chowdhry adds. “We know of some designers who went with the subscription model for three months and then cancelled the subscription, as the project they were working on got completed...seems like [the] subscription model will have a near-term cannibalistic effect on ADBE.”

Finally, Chowdhry refers to the momentum on Adobe's Omniture business as being “somewhat weak.”

“Here the threat is from's (NYSE: CRM) Radian6 product, which is a lot cheaper and easy to use,” Chowdhry explains. “Probably Omniture is ~10% of ADBE business.”

On the upside, Chowdhry says that Adobe's PDF business (particularly InDesign) is “stable,” and that the federal business (which accounts for approximately 10% of Adobe's business) is also “somewhat stable.”

“We think [the] negatives outweigh [the] positives,” Chowdhry concludes. “ADBE is in transition – from shrink-wrapped software to delivering software services as subscription and from cloud. I do see at least 2 - 3 more quarters of flattish to somewhat declining business for ADBE. We don't see any revenue catalysts for the next 2 - 3 qtrs.

“[The] stock will probably go sideways, so avoid the stock.”

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