Adobe woes and your profit had you followed my short advice

GREENSBORO, NC -- On March 6th, I wrote a post saying that I was wary of the business prospect for Adobe, the maker of the very excellent website design software Dreamweaver. The title of the post was I'd short the heck out of Adobe, a reference to the stock trading method of placing a bet that the stock price will decline in the future. The day I wrote that post, Adobe's stock closed at $68.92. Yesterday it closed at $60.20. If you had followed my short advice, you would be sitting on a gain of 12.7%.

My opinion then was that Adobe was making a mistake by no longer allowing customers to buy and install Dreamweaver (and other flagship products, like Photoshop) on their computers. Instead, they moved those products exclusively to a cloud based subscription service. I thought that was a dubious move—a roll of the dice that did not justify the then 121 price to earnings ratio (P/E).

[P/E: The price of a share of stock divided by the annual earnings per share. At 121, it would take 121 years of earnings to total the current share price. The S&P historical average is currently 16]

Even with the stock's decline, Adobe's current P/E ratio of 117 is still way too high, for the same reasons I posited previously: I doubt the ability of the cloud-only software model to sustain Adobe's revenues, much less grow them.

Indeed, Adobe's entire cloud service went down yesterday. Customers who no longer have Adobe's software installed on their computers, who had moved to the subscription service, were left in the lurch. I cannot imagine how businesses are supposed to put any confidence in mission critical infrastructure vulnerable to these kinds of sustained outages. From Reuters:

Adobe Systems Inc said on Friday that access to its Creative Cloud was restored following an outage that disrupted the Web-based, subscription service to top-selling software programs including Photoshop, Illustrator and Flash for about a day.

Customers can apply to get compensation for the outage, which company spokeswoman Vanessa Rios said lasted about 24 hours and was due to a database software failure.