September 22, 2010, 1:54 PM — Yesterday I reported that shares of software vendor Adobe Systems (NASDAQ: ADBE) took a hit after the company reported its Q3 earnings -- not because of the results, which were quite good, but because of the company's forecast for the fourth quarter.
Since then things have gotten worse for the company's stock. In heavy trading early Wednesday, Adobe hit a new 52-week low of 25.81, which is 21.6 percent down from Tuesday's close of 32.94. Shares had crawled back to 26.40 by early afternoon as trading volume eased. You can pretty much expect Adobe shares to linger in the mid-20s in the foreseeable future.
Is Adobe, coming off a successful quarter in which it exceeded expectations, really now worth only 80 percent of its value just two days ago? It is in the eyes of investors. And that's because Wall Street doesn't care what you've done, or even care what you've done lately. The only thing that matters to the Street is what they think you're going to do. (Which only makes sense, since investors bet on future performance.)
So even though Adobe beat consensus estimates for Q3 sales and earnings, its fourth-quarter revenue estimate of $950 million to $1.0 billion fell short of Wall Street predictions of $1.03 billion. And while the low end of Adobe's Q4 revenue forecast is only 5 percent under analyst expectations, and the high end virtually equal to consensus estimates, the Street is an unforgiving (and often over-reactive) place.
This MarketWatch article cites a half-dozen analyst downgrades, which undoubtedly helped fuel today's selloff stampede. The most damning analyst comment came from Credit Suisse's Philip Winslow, who wrote, "We expect Adobe to report massively decelerating revenue growth for the next four quarters. We believe that investors are better served owning other similarly or more-cheaply valued software companies.”
Despite this, Credit Suisse downgraded Adobe to neutral from outperform. Why "neutral" for a company expected to report "massively" decelerating revenue growth over the next year? Why not "sell"? Partially because the new reality already is reflected in Adobe shares. And also because "sells" are bad business for brokerages.