So the highly-profitable multimedia and creativity software company, Adobe, has agreed to acquire web-first collaboration design platform, Figma, for $20 billion (half cash, half shares). At roughly 50 times next years revenues, and considering Adobe’s current total market cap is only around $173 billion, this is a hefty price tag, especially at a time when the market is down and economic growth is slowing. We share our thoughts on the acquisition and the future of Adobe in this quick note.
We Currently Own Shares of Adobe
Adobe is an extremely profitable company (it has a net profit margin of nearly 30%), a robust revenue growth trajectory (a low single digit forward revenue growth rate) and we currently own shares in our Disciplined Growth Portfolio (it trades at ~6x sales—not bad considering its high profitability and healthy growth rate).
Why Figma
Figma is an attractive business that will in theory complement Adobe. For example, Figma’s web-first platform allows Adobe to expand its reach beyond mainly professional creative people (to developers and other users), and Figma has already solved some of the very difficult web-based collaboration issues that plague the industry. Figma is already profitable, it is growing revenues very rapidly (annualized recurring revenue is poised to more than double for a second straight year, surpassing $400 million in 2022), and it has an incredible 150% customer revenue retention rate. Further, there is a massive market opportunity, and this acquisition will expand Adobe’s potential. These are all good things.
Adobe Paid A LOT for Figma
At roughly 50 times forward revenue, Adobe paid a lot for Figma, especially at a time when market valuations are way down and GDP growth is slowing. For perspective, Figma raised private capital in June 2021 that valued the company at only $10 billion (keep in mind valuations for growth stocks were sky high in June of 2021 versus right now). Shares of Adobe have dropped nearly 20% on the news—on the same day Adobe released quarterly earnings—which were very strong, as usual. And per Adobe CFO, Dan Durn, during Thursdays conference call:
the transaction will be dilutive to Adobe’s non-GAAP EPS and we expect it to be breakeven in year three and accretive at the end of year three.
Worth mentioning, Adobe has plenty of cash and free cash flow (as mentioned the business is very profitable), and this acquisition won’t create any type of cash flow issues for Adobe. Also, once the deal is finalized, Adobe will resume share repurchases, which can help offset some of the shareholder dilution.
Takeaway
Adobe paid too much for Figma. This is often a problem for very profitable companies with lots of cash (like Adobe)—they go shopping for inorganic growth and end up paying too much for it. However, in the long-term the deal will eventually be accretive to shareholders. What’s more, the share price damage is already done as Adobe shares fell ~16% on the news. We intend to continue holding our shares of Adobe, and if you don’t already own shares—you might consider purchasing because it will continue to be a high-growth, highly-profitable business with lots of long-term share price appreciation potential. Ten years from now, we expect Adobe’s share price can easily be 5x (or more) what it is right now.