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Adobe on the Right Track

Stocks in this article: ADBE ORCL RHT

NEW YORK ( TheStreet) -- Corporate makeovers are never easy on Wall Street, regardless of whether the business transition has merit.

Not only do conversions create plenty of uncertainty, but they also tend to disrupt the current operation. When the business is disturbed it has an impact on revenue and profits.

While Adobe (ADBE) has certainly earned the Street's patience as management converts its business from the traditional software sold in a box to an online/cloud subscription-based model, I've been impressed by the level of execution. Management has operated flawlessly, which compelled me to ask how long the company can maintain its momentum. Things are not supposed to be this smooth.

Even more impressive is that over the past two years as Adobe was working on this challenge, the stock has jumped from $23.17 in August 2011 to Friday's close of $47. Essentially, investors have embraced Adobe's new model. After posting solid fiscal second-quarter results, I believe it's time to shed the word "transition" in this business. Adobe has arrived.

However, this success has not gone unnoticed. With shares up 23% year-to-date and more than 35% over the past 12 months, I can't say I see any value left. It does seem as if the Street is pricing this stock for perfection. While I don't disagree that Adobe has been very deserving, there's also such as thing as too much optimism. I suspect that this over exuberance applies in this case.

Given this recent quarter has not been too kind to software companies including Oracle (ORCL) and Red Hat (RHT), Adobe investors were a bit nervous heading into the quarter. But the company had shown plenty of confidence. The numbers showed why. Before I dive into them, I've reminded you above that business model transitions cause disruptions. So let's keep things in perspective.

The company posted a 10% year-over-year decline in revenue with sales for Adobe's Digital Media business falling 18%. Again, this is because the company is essentially moving away from this business. Besides, the numbers matched Street expectations. Now, with declining revenue figures, you should expect plummeting profitability -- not a big shocker there, either.

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