Adobe Plunged After Acquiring Figma. Here's Why I Bought The Dip

The company paid a steep price to take out a major competitor.

Shares of Adobe (ADBE) plunged after the company announced that had it reached it a deal to purchase Figma for $20 billion.

In a nutshell, here’s what Figma’s products do: they make it possible for groups of people to design interactive mobile and web applications collaboratively.

Figma competes with Adobe XD, which is another piece of software for designing web and mobile applications. But Figma is known to be much easier to collaborate with and you can use it in a web browser, as opposed to on a desktop, which a lot of people like.

Given Figma’s superiority over XD, some are viewing Adobe’s acquisition as a defensive move. And since Adobe is paying such a steep price for Figma— 50x this year’s annual recurring revenue (ARR)—there’s probably some merit to that argument. The median cloud software stock is currently only trading at around 7x revenues.

There’s no question about it: this is a very, very expensive acquisition.

That said, Figma is a valuable asset that has a lot of potential synergies with Adobe’s business. Figma is on track to double its ARR this year to $400 million; Adobe can easily accelerate that already high growth rate thanks to its scale and distribution advantages.

Additionally, Adobe can use Figma’s technology to bring its other products to the web—like Photoshop, Illustrator, Lightroom, etc.— and add top tier collaboration features to them.

“Figma’s web-based, multi-player platform can accelerate the delivery of Adobe’s Creative Cloud technologies on the web, making the creative process accessible to more people.” - David Wadhwani, President of Adobe’s Digital Media Business

Amal Dorai, Partner at Anorak Ventures, noted that this is something that Adobe couldn’t do on its own.

One interesting thing that Adobe said was that two-thirds of Figma’s users are not designers, they’re developers, project managers, marketers and others. The company sounded excited about potentially expanding its customer base and having all these stakeholders working together using its software.

In terms of the numbers, Adobe is paying for the $20 billion acquisition, half with cash and half with stock. The acquisition is expected to reduce earnings per share over the next two years and then increase it starting at the end of year three. 

I have mixed feelings about this acquisition. On the one hand, it’s not great to see Adobe pay an amount equal to 12-14% of its market cap for a company that’ll boost its revenues by only 2-3%.

On the other hand, Figma is growing at a blistering pace and there are a lot of potential synergies that the two companies can unlock together. Only about $10 billion of the acquisition is being paid for in stock, so share dilution will be in the single digits, which is manageable.

For me, the bottom line is this. Adobe is still the leader when it comes to software for digital content creation. They’re highly profitable, the valuation is way down from where it was several months ago, and they just took out a major competitor.

Adobe’s management also has a history of creating shareholder value, having grown earnings per share and the stock price at compound annual growth rates of 18% and 25%, respectively, over the past decade.

I’m a buyer on the dip.