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Can Adobe Maintain Its Momentum?

NEW YORK ( TheStreet) -- There's nothing that Wall Street hates more than uncertainty, and investors may be wondering about Adobe (ADBE - Get Report) as it makes a major transition in its business model.

Adobe -- still the dominant leader in the multimedia software market -- has been working to transform its business from the traditional "software sold in a box" to an online/cloud subscription-based model. So far the transition has gone well.

On Tuesday, the company will report results for its second quarter, and investors will be watching closely to see if the company can continue its momentum after a strong start to the year. The stock, trading at around $43, is up 25% so far this year.

Given the early struggles that Microsoft (MSFT - Get Report) experienced with its Office 360 subscription, analysts had doubts that Adobe would make its transition as well as it has.

Microsoft was looking for a cloud-based subscription model to save on distribution costs and make it easier for users to update their software. Likewise, Adobe saw this conversion as inevitable. The only question was how long the transition would take.

Not only have customers responded favorably to the subscription model, but management's acrobatic moves have brought new life to Adobe's Creative Suite franchise, which added 153,000 Creative Cloud service customers in the first quarter.

Investors want to know if this streak can continue or is it time to cash in. I don't believe that Adobe has been just lucky -- not when the level of execution has been this consistent. The company had a great start to 2013 as it reported first-quarter revenue that beat estimates for the second consecutive quarter. That was during a period when other software companies were missing estimates and lowering their outlooks.

Adobe's management said that the results were helped by higher subscriptions, as revenue doubled from the same quarter a year earlier. Even more impressive: profitability has remained strong during the transition.

It seems as though management discounted its own talent and appeared to be stunned by the higher rate of conversion of customers to the subscription platform.

I don't believe that Adobe's management team has gotten enough credit, nor do I believe that investors fully appreciate how rare this sort of transition is. Besides the impressive results for the first quarter, management raised its earnings and revenue estimates for the year.

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