Irony alert! Adobe surges while Apple tanks

Investors are betting that Adobe's transition to a cloud software model will be a success.

I'll take tech stocks beginning with the letter A for $800, Alex.

Apple (AAPL) shares were down again on Friday, continuing a miserable couple of weeks for the maker of iEverything. But how's this for a bit of irony? Apple's former software friend Adobe (ADBE) was surging Friday after better-than-expected earnings.

Adobe's stock gained 6% and shares are now up 33% for the year.  Adobe's shares are less than 1% off their 52-week high while Apple has plunged nearly 30% from its 52-week (and also all-time) high.

Adobe and Apple are both up big in 2012. But Adobe has steadily climbed higher while Apple is in the midst of a spectacular pullback

Apple and Adobe were once close partners. After all, they shared a common enemy: Microsoft (MSFT). But as Apple grew from plucky underdog to leader of the tech universe, the relationship between Apple and Adobe began to show strains. That culminated with the now infamous diss of Adobe's Flash by the late Steve Jobs in a 2010 blog post.

Long-term Adobe investors are probably relishing how the tables may be turning on Apple. But it's still a bit curious that Adobe was up so dramatically Friday since its guidance looked pretty weak. Were investors just Photoshopping the forecast and adding their own more bullish outlooks? Traders on StockTwits were debating the Adobe rally Friday.

ThanhVII
$ADBE Horrible guidance, better buy some cheap puts tomorrow.

jmullin9
Do the buyers in $ADBE not see the guidance? Or am i the dunce thats missing something

You are not a dunce. I was surprised at first to see that the reaction to Adobe's earnings were so strong. Yes, they topped forecasts for its fiscal fourth quarter.  But Adobe is a momentum stock. It didn't need to merely limp over a low bar. And the guidance appeared to be weak. Sales and profits for the first quarter were below Wall Street's consensus estimates.

But here's the reason investors are excited. Adobe is transitioning from an "old" licensed software model to a cloud model. As customers switch to Web-based subscription versions of Photoshop, Dreamweaver and other products in its Creative Suite, that could hurt revenue and earnings in the short-term but wind up being extremely lucrative in the long-term.

howardlindzon
Like $RAX ...investors are valuing adobe on past biz not wehere they are trying to swim (long $ADBE)

1nvestor
my 1st take on this is that folks are liking the increase in the Subscription model growth. Time will tell $ADBE

If Adobe truly is able to become a successful cloud computing company, it could wind up fetching a much higher valuation. The stock is only trading at about 16 times next year's earnings estimates right now. Cloud darlings Rackspace (RAX) and Salesforcce.com (CRM) are valued at more than 60 and 80 times 2013 earnings forecasts respectively.

Now are those P/E ratios too high? Probably. But it's clear Adobe has room to grow into a higher earnings multiple if its cloud gambit pays off.

And any investor that was betting against Adobe before earnings on Thursday may now be realizing the error of their ways.

mytfine
@jd816: $ADBE 16,588,979 shorts standing as of 11/30/12, 6 days to cover."and I'm sure every one one of the will cover tomorrow...

Time for Reader Comment of the Week. I wrote on Tuesday about how rumors of Carl Icahn taking a stake in Hewlett-Packard (HPQ) made sense. Some activist investor might want to start kicking HP's tires. That led to this sarcastic comment.

@LaMonicaBuzz if Icahn got wind of a content deal with $DIS happening next month, I bet he'd buy shares of $HPQ—
Nigel Hawkesworth (@NetHawkesworth) December 11, 2012

Ha. Icahn's timing was impeccable with that Netflix (NFLX) investment coming before the Disney (DIS) news . But something tells me he'll want Reed Hastings to do more than just strike new content deals. He's still going to push for Netflix to be sold. Too bad nobody's tightening the screws on HP.