The drop in Adobe shares following Wednesday’s earnings announcement was blamed on a number of factors, ranging from earnings to acquisition expenses. We don’t believe a word of it. As we said here, the reason shares are underperforming is because of their product cycle.
Take a look at the chart. The two annotated points are the release dates of the first and second versions of Adobe Creative Suite. The stock rose dramatically leading into the release but faltered afterward, as the 18-24 month product upgrade cycle suggested that following the immediate increase in sales things would slow down. Since Wall Street likes to look ahead about 6 months, the time a new product is released makes for a good time to sell.
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Now, according to our theory, the shares should be rallying ahead of the release of Creative Suite 3. So why do we blame Wednesday’s slump on the product cycle? We chalk it up to conflicts between rumors. Will the CS3 launch occur in late 2006 orĀ  early 2007? The six-month date discrepancy calls for a short term pause before the shares rally again.

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