Shares of Adobe Systems (Nasdaq: ADBE) opened more than 20% lower today after a thoroughly disappointing turn at the earnings report podium.
It's not that this quarter was all that bad, mind you; third-quarter sales increased by a very healthy 42% year over year, and GAAP earnings per share jumped from $0.26 to $0.44. A generous share repurchase program helped, as did the recent launch of Creative Suite 5 -- Adobe's flagship product package.
Nor did the next-quarter outlook point to a disaster of epic proportions. If management got its assumptions right, next quarter will be about slightly down or even with this one in terms of revenue while earnings take a modest step up.
But you see, the market was expecting so much more. When Adobe updates the Creative Suite, a good sales cycle tends to deliver big growth in the following fourth quarter. Management doesn't see it happening this time, so the stock goes down the tubes. The culprits behind this shocking development are a weak educational market and slow sales in Japan, both of which represent very large portions of Adobe's business.
The spat with Apple (Nasdaq: AAPL) over publishing iPhone applications made with Adobe's toolkits or pushing Flash onto the platform had little effect on these numbers, nor should the recent reversal of the iPhone ban help very much. Adobe lives and dies by its creative tools, and Flash is just some nice gravy on top of that.
So is it time to back up the truck to load up on Adobe shares? Not hardly. Yes, the stock is now trading at five-year lows if you exclude the infamous market meltdown of 2008. It's also much more expensive than Microsoft (Nasdaq: MSFT), Google (Nasdaq: GOOG), or even Apple by many metrics even after today's slide. Mr. Market still expects wonders from Adobe, and management just admitted it might not be able to deliver on those expectations.
There are heaps of better choices in the software world for value hounds and growth gurus alike. Check back on Adobe when its valuation matches the real growth prospects, which it doesn't today.
Keep an eye on Adobe by adding it to My Watchlist.
