December, 2018

Is a slowdown coming in Adobe’s subscription growth?

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When we look at Adobe’s consumer purchase intent (PI) mentions in the LikeFolio research dashboard, something really interesting pops out:

Adobe Purchase Intent Mentions have begun to falter

Here are the key takeaways from this chart:

  • PI growth from 2014 to 2018 was very strong, and led the explosive move higher by the stock by 6-9 months.
  • PI growth stalled in the spring of 2018, and has been falling steadily since (note that the stock seems to have peaked about 6 months after the PI peak as well.
Andy Swan discusses Adobe Earnings on TD Ameritrade Network

What does this mean?

It means that less people are talking about signing up for Adobe’s cloud based services than they were 6-9 months ago.  In other words, subscriber growth rates are likely beginning to slow.

Because 90% of Adobe’s revenue comes in the form of subscription payments, its revenue is quite predictable.  So our advantage here with LikeFolio data is not an advantage in terms of the full revenue stack, but rather an insight into how much additional business the company is generating on top of its existing subscription revenues.

Trading ADBE from here

To be clear, ADBE did NOT get a bullish/bearish signal in our famous Sunday Earnings Sheet this week.  There’s no big screaming trade to be made here, based on the data we have.

That said, when we look at a company like Adobe and think about it potentially facing a slowdown in subscription revenue growth, it does bring up some interesting trading thoughts, such as….

Could I sell call options above the market here?  Essentially making a bet that the stock won’t have a major post-earnings rally, with the idea that if it does get a small move higher on the report, I don’t mind having a bearish position on it for the next 6-12 months.

This is not a recommendation.  Only you can develop a trading strategy that fits you.  But it can be informative and fun to think through ways to establish data-driven positions, even when the data isn’t screaming a clear signal.

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