NEW YORK (TheStreet) -- Leading up to Adobe's (ADBE) third-quarter earnings results, I wasn't entirely convinced that management could sustain the company's incredible run, which included a 38% year-to-date surge in the stock. Although Adobe had made meaningful progress converting its business from a boxed software company to a cloud subscription model, the Street sentiment -- I believe -- was getting too bullish.The changeover was necessary because Adobe has struggled to grow revenue and margins on its once-dominant creative suite of applications -- the package that includes popular titles like Pagemaker and Dreamweaver. Complicating matters even further: that the stock still carried a price-to-earnings ratio of 59, which was 6 times and 5 times that of Microsoft ( MSFT) and Oracle ( ORCL), respectively, didn't suggest that there was any value left. Although Adobe's numbers did arrive better than expected, the valuation concerns -- in my view -- have not gone away. First, given how difficult corporate makeovers tend to be, there's no denying that the pace of Adobe's cloud conversion is impressive. Truth be told, seeing as how Google ( GOOG), by virtue of its free Google Apps, has disrupted Adobe's business, I never really believed that Adobe's management would have gotten the company this far. But, while the Street is cheering Adobe's 73% climb in its subscription revenue, on an organic basis, that growth number is closer to 25%, when excluding the Neolane acquisition. To be perfectly fair, 25% revenue growth is nothing to shake a stick at, especially when Oracle is posting growth of only 2%. My point, though, is that while we're busy doing backflips for Adobe, investors just gloss over the fact that not only did the company still miss its revenue estimates, but overall revenue was down 8% year over year. In that regard, it's certainly encouraging that the strong subscription revenue now accounts for 30% of the company's total revenue. However, even when you factor in the combined 17% increase in service and support revenue, I don't believe this is enough to offset the near 30% decline in product revenue. Now this is where Adobe bulls often remind me that the company is in "changeover mode." I'm not discounting that -- I've acknowledged this point in the introduction.
Even so, there are still very important issues that management need to address. Not the least of which has to do with the company's profitability and eroding margins, that, again, was an issue this quarter. That gross margin declined 370 basis points combined with roughly a 10% increase in operating expenses, does not give me that "warm and fuzzy feeling" about a stock that is already expensive. This time, the combination of shrinking margins and higher expenses resulted in a near 60% decline in net earnings -- with earnings per share falling in the quarter from 40 cents to 16 cents. While the EPS number looked much better at 32 cents per share on a non-GAAP basis, Adobe still missed consensus estimates by 2 cents. Look, I'm not just beating up on Adobe here. In fact, these are the same concerns that I've raised against Salesforce.com ( CRM) and Workday ( WDAY) -- two companies that are experiencing impressive growth spurts. But they, too, seem eager to sacrifice profits to appease Wall Street's growth demands. And Adobe is following the same model. We can get excited all we want about the robust growth, but Adobe seems to have embraced a "startup mentality" even though it's -- as I see it -- a mature company. Yes, Adobe has a smart management team; I'll never question that. But this is still a cutthroat software industry. As long as companies like Google continue to offer free software alternatives, and Apple ( AAPL) showing more interest in digital marketing, it's tough to model what Adobe's long-term margin leverage will look like. The good news, though, is that Adobe's customers appear to have fully embraced the transition to the cloud. Despite that, I don't believe investors should immediately assume that all of the risk is gone. With the stock now trading at near 52-week highs, there's no better time to lock in some gains. At the time of publication, the author held shares of Apple. Follow @saintssense This article was written by an independent contributor, separate from TheStreet's regular news coverage.