Adobe stock analysis: Golden cross pattern takes shape ahead of earnings

Adobe stock continued its strong rally this week, reaching its highest level since February this year. ADBE has soared by 52% from its lowest level this year, and this rally may continue after forming a golden cross pattern as its earnings loom.

Adobe stock has formed a golden cross pattern

The daily chart shows that ADBE stock has soared in recent months, climbing from a June low of $190 to its current price of $289. The rally was driven by investors buying the dip and a broader rebound in software stocks. Adobe's uptrend continued on Thursday, boosted by Salesforce shares surging after a strong earnings report.

Adobe has moved above the crucial resistance level of $275, its highest level on June 1, a sign that bulls have prevailed. Most importantly, it has now formed a golden cross pattern as the 50-day and 200-day Weighted Moving Averages (WMA) crossed each other. This pattern normally leads to more gains over time. 

There are also signs that the stock has formed an inverted head-and-shoulders pattern, which is a common reversal sign. This pattern is made up of a head at $190, shoulders, and a neckline at $275. 

Therefore, the most likely scenario is where the stock continues rising, with the initial target to watch being at $300. A move above that level will point to further gains, potentially to the crucial resistance level of $362, its highest level in December last year. A drop below the crucial support level of $260 will invalidate the bullish outlook.

ADBE stock chart | Source: TradingView

Adobe has become a bargain ahead of earnings

Adobe, a company that owns popular brands like Photoshop, Illustrator, InDesign, Lightroom, Acrobat, Bridge, Animate, and Behance, has come under substantial pressure in the past few years. Its stock has plunged by double digits, making it a fallen angel.

Adobe shares have pulled back as investors reacted to the ongoing SaaSPocalypse fears. This is a situation where investors are fearing that software companies will be disrupted by AI tools. Adobe’s management has denied claims that AI will disrupt its business.

The recent sell-off turned Adobe into one of the cheapest names in the stock market. Seeking Alpha data shows that the company trades at a forward price-to-earnings ratio of 11.20, much lower than the sector median of 22.90. Its five-year average was 25.

The company also has an attractive Rule of 40 metric of 50%. It is made up of a revenue growth of 11% and a free cash flow margin of 39%. A Rule of 40 metric of 40 and above is a sign that it is trading at a bargain level.

The upcoming earnings report is expected to show that its revenue grew in the last quarter. Its revenue is expected to come in at $6.7 billion, up by 11.8% from what it made in the same period last year. For the year, the company is expected to jump by 11.60% to $26 billion. 

With its stock trading at bargain levels, chances are that it will announce a big share buyback. In April, the comany announced a $25 billion authorization, which will see it continue reducing its outstanding shares. Over time, the company has reduced its outstanding shares from 472 million in 2022 to the current 399 million.