ADOBE (ADBE) ANALYSIS: DOWN -9% after EARNINGS! Buy the DIP or RUN for the HILLS?

[Music] so Doby reported after hours yesterday September 12th and today the stock is trading down almost 9% with the stock price hovering just around the $530 range now friends despite this move down Market implied sentiment which is based on my PFC model is relatively flat just at about negative 0.03 which implies that valuations are relatively fair so in other words there's really no aggressive pricing one way or the other and friends when looking back over the last 18 years when the stock trades at these sentiment levels subsequent three-year annualized returns you can think of these as forward returns were between minus5 to 45% per anom which is a relatively wide range but it's not too surprising given that the stock is trading at fair value at these levels and friends if you want to know more please keep watching hi everybody welcome back to the channel collective intelligence where we offer a non-nonsense datadriven approach to evaluating investment opportunities I'll sh with you my investment approach which is a market sentiment model that I've developed during my time at Goldman saxs and the S clear university endowment and I'll share with you what I'm seeing with the data and hopefully you can use these insights into your own due diligence process that said today's video is on Adobe stock ticker adbe one of the longest standing and best of breed firms in the software industry and it's a company that I've liked for a very long time and it's actually on my watch list of companies and friends I normally make videos on stocks where I think the risk reward is skewed very favorably for the upside think the likes of Nike SD Lauder Starbucks and Dollar General but with Adobe that's not so much the case the stock based on my model is just about neutral even with the 10% decline that we saw today and I'll explain why I made a few videos already explaining some of the rationale on my Approach so I'm going to make this video relatively short and sweet and straight to the point without having to do a deep dive into the rationale for those of you who want a deeper dive you can watch my earlier videos on Nike and Estee Lauder which goes into a little bit more detail on my psse Approach with that said let's Jump Right In friends Adobe took a hit this morning after they reported earnings after hours yesterday on the 12th while they exceeded NLS estimates for Q3 it was their Q4 guidance that actually put a lot of pressure on the stock modestly lower price targets from a number of different brage firms including City Bernstein UBS as well as the tech overhang and valuations over the last several months may also have played a role in this Decline and friends as always the point of this Channel and video is not to do a deep dive into the background of the stock or to recap past events for Adobe there's plenty of resources out there that you can tap into if you want more details and those include Seeking Alpha tip rank CNBC Bloomberg and even other YouTube channels my objective is to provide you with a succinct recap of the results of my analysis on Adobe and where I think the stock might go from here again I'm hoping that it can complement and be additive to your own due diligence process and friends as always before we jump in just a reminder and disclaimer that this video and contents they in are my opinions only and not investment advice all investors are different and have unique needs so you should do your own research and due diligence and seek advice from an independent licensed professional that knows your unique situation and can recommend Investments based on your specific risk tolerance friends with that said let's go ahead and Dive Right In friends let me give you the summary first before I go into the details so Market implied sentiment for Adobe using again my PSU model is neutral with a PSC value of just under zero minus 0.03 meaning that sentiment is neither biased or skewed towards the upside or the downside and friends for me this represents a relatively fair value based on on neutral sentiment and neutral expectations in other words I don't see a bias and sentiment one way or the other and hence the view of fair value over the last 18 years when Adobe traded at these levels subsequent threeyear annualized returns ranged from minus5 to positive 45% now the range as I mentioned earlier the range is relatively large and friends that is generally expected as I usually see wider outcome variability when assets are trading at fair value risk reward is skewed neutral for for long-term shareholders so one can expect to really earn kind of a decent compound growth rate in this name over a 3 to 5e Horizon and that amount is usually about 15% perom investors may want to Simply have a neutral waiting to this name and add as prices become more attractive and friends just a little PSA Public Service Announcement if you want to learn more about my model my PSC model I'm planning on uploading a longer presentation that talks about the wise and the hows of my psse Approach because it's a relativ longer presentation it's taking me a little bit longer to work on um you know make edits uh as well as uploads so friends if you hit the Subscribe button you'll be notified when it's uploaded and now that the PSA is over back to the analysis and here's the sentiment or psse model which is in green overlaid with the stock price which is in blue now the stock price graph is in log scale because it's a little bit more visually appealing just given that we had this huge run up in the stock over the last 18 years and Friends when it's overlaid in this way you can get a better sense of the sentiment and the level of optimism and pessimism in the marketplace at every point in time and at every level of stock price now friends investing on Market implied sentiment is generally what has worked well for me over the years I prefer to understand Market sentiment because it tells me how aggressive or conservative markets are and how they are pricing assets and so said differently it tells me whether the markets are scared exuberant or somewhere in between and I can Leverage off that information now friends in Prior videos I I might have mentioned this um a number of times but I generally like to have exposure to high quality durable stocks stocks like Adobe um where sentiment is neutral in other words it's within kind of plus or minus one standard deviation from the mean or when sentiment sour and pessimism dominates like what we saw here in 2014 and 2018 but friends the area where I actively try to avoid long exposure is when sentiment becomes too optimistic and markets are pricing in relatively aggressive assumptions like what we saw in August 2020 when the psse levels were at a positive 2.4 that's 2.4 standard deviations away from the average and November 21st when psse levels were at a positive 2.1 that being 2.1 standard deviations from the average now friends don't get me wrong while money can still be made shortterm when sentiment is high I generally avoid those times because the risk reward Bo especially over the long term is skewed towards the downside and really probabilities in my view are just no longer favorable for long-term investors like myself as usual friends to put the model in another perspective I break the model levels into desiles think of this as 10% chunks from the lowest 10% to the highest 10% to see the average subsequent and four three-year returns in each model desile and what we see is generally a downward sloping curve and again this is further evidence of the robustness of the model as it's consistent with my thesis and my thinking that lower desile values when the stock is cheap should produce higher returns than at higher desile values when the stock is more expensive and friends today again Adobe stock is trading at the fifth desile here's another variation of the desile graph but now with highs and lows included so this graph shows not only the average returns but also the highs and the lows for each model desile again it's consistent with my model expectations not only do you have higher average returns as things get cheaper you also see higher highs and higher lows As you move from the 10th desile over from the right towards the first desile towards the left and friends I think it's worth mentioning again the reason why I like to look over a 3 to 5e time Horizon and that's because of the concept of time Arbitrage the further that you go out in time the short and the interim noise the day-to-day week to week month to month even quarter to quarter noise cancels out and it allows you to see the process play out and as the process plays out you're going to end up getting a stronger and much more reliable signal and that's time Arbitrage and in my view it's one of the most powerful elements in investing and it's one of the most powerful ways that most if not all investors can use to their advantage so friends to quickly summarize adob is currently trading at a minus 0.03 psse level which translates to a stock price of just about $530 and Market implied sentiment is neutral and I believe that the risk reward here in this case is skewed neutral which means that pricing is relatively fair and in terms of portfolio sizing in my view it should be relatively neutral you shouldn't be overweight or underweight uh at these levels psse levels at a minus 0.03 have historically introduced relatively wide range of outcomes so friends be prepared to buy more if the price dips and as always friends brace for volatility in the short term as return in the short term can be very volatile in the short term I'm talking about 20 days 5 days even 60 days the outcome variability is extremely high you know in fact if you look at the data for Adobe there have been periods of time where the returns were minus 30 all the way to plus3 over a very short 20-day time period And so friends as always you need to brace for this volatility and noise it's just a natural part of the investment process but I do think you will have a huge Advantage if you can think in terms of those three to 5e time Horizons that's also the reason why I think endowment management um has been so successful over the years because institutions like Santa Clair University where I managed the portfolio for the last 17 years can make investment decisions and sit on those decisions and allow the thesis to play out over time thanks again everybody for watching if you like the content and found it helpful for your own analysis again please hit the like And subscribe button so you can get notifications on on any new content that I upload also it helps the channel out with a YouTube algorithm so thanks again everybody for watching and wishing you all investment success I will see you next time