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Wall Street Seems All In on Adobe

Stocks in this article: ADBE GOOG AAPL MSFT ORCL CRM

NEW YORK ( TheStreet) -- Software giant Adobe (ADBE), which is due to report third-quarter earnings on Tuesday, has become (on many levels) a very interesting story. Without a doubt, this company still has a say not only in the world of digital media, but also in content distribution and consumption.

But it's unclear, though, whether management can effectively prioritize the company's collective ambitions.

You see, over the past couple of years, Adobe has struggled to grow revenue and margins on its once-dominant creative suite applications -- the one that includes popular titles like Pagemaker and Dreamweaver. Free offerings from rivals like Google (GOOG) and software alternatives from Apple (AAPL) and Microsoft (MSFT), began eating into Adobe's market share. Not to mention, each of these companies had cloud-distribution advantages, an area Adobe had yet to adopt.

In a case of "if you can't beat them, join them," Adobe has been working to transition its business from software sold in a box to a cloud/subscription-based model. On top of that, Adobe recently announced a $600 million all-cash deal to acquire Neolane, a privately held French company France that specializes in cross-channel campaigns.

Given Neolane's capabilities in online and offline marketing, I won't dispute that this acquisition makes perfect sense. But again, given Adobe's transition, I have to question the timing. And I believe that this just might have been a case where management has bitten off more than it can chew.

The other concern is with Adobe's digital media business, which has been -- as I said --shedding revenue, including a drop of 18% in the June quarter.

I appreciate that management has decided to move away from this business. But it's still an important source of cash flow. Not to mention, this brings up a very important question:

To what extent can Adobe offset these declines, while (at the same time) implementing a new business model, given Neolane's annual revenue of (only) $60 million, which amounts to just 1% of Adobe's 2012 total sales of $4.4 billion?

To be perfectly honest, beyond the software synergies, I'm not seeing what Adobe hopes to accomplish here.

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