Wall Avenue Hates Adobe’s Figma Acquisition: What If They’re Improper?

Shares of Adobe (ADBE -1.69%) cratered final week following the announcement of its $20 billion acquisition of design collaboration software program agency Figma.

The worth tag quantities to about 50 instances Figma’s projected 2022 gross sales. So at a time when many software-as-a-service (SaaS) shares have seen their price-to-sales ratios reduce in half or extra, Wall Avenue analysts are nearly uniformly destructive on the deal, citing its excessive worth. Adobe noticed a slew of downgrades following the information.

However what if the acquisition is not so overvalued? In spite of everything, Meta‘s acquisition of Instagram and Alphabet‘s acquisition of YouTube have been additionally considered costly on the time, but each wound up being large successes. Might Figma do the identical for Adobe?

Why analysts hate the transaction

Adobe is shopping for Figma for $20 billion in money and inventory — truly, nearer to $22 billion, when factoring within the inventory models granted to Figma co-founder and CEO Dylan Discipline and different Figma workers, which is able to vest over 4 years.

Skeptics assume that is an astronomical worth to pay for a corporation projected to make simply $400 million in annualized recurring income (ARR) this 12 months. The very best-valued software program inventory I can consider is Snowflake (SNOW -2.64%), which at the moment goes for 35 instances gross sales. So the 55 instances gross sales determine appears outlandish to many. 

Some analysts worry Adobe may very well be overpaying for Figma as a defensive transfer. Figma designs web-based, multiplayer design software program, which some assume may have ultimately grow to be an actual aggressive menace to Adobe’s dominant design software program suite. Constructing collaborative software program that may be accessed by a number of customers requires a distinct structure than software program simply delivered to 1 person, and apparently, Figma’s platform is de facto resonating with designers. So some thought Adobe was motivated to pay an irrational worth to amass a strong future competitor. 

Why the acquisition may work — probably very nicely

Whereas I am not saying the acquisition was a steal, it is truly not that costly when fascinated by the synergies Figma can probably obtain inside Adobe.

First, Figma’s development price is an eye-opening 100% 12 months over 12 months. That is about pretty much as good as you’ll discover for any firm at a $400 million run price and exceeds Snowflake’s latest quarterly development price of 83%. Figma’s web retention price — or the quantity current clients spent relative to final 12 months — was 150%, which can be pretty much as good as one will discover throughout the SaaS sector.

One key quantity that stands out is Figma’s 90% gross margin. Gross margin is necessary as a result of since Adobe already has a world gross sales pressure, over time, Adobe ought to be capable to rationalize Figma’s gross sales group, both by slicing headcount or rising its personal gross sales pressure extra slowly within the coming years than it in any other case would have. I think Figma’s analysis and improvement group will stick round, however once more, this may be mitigated by Adobe hiring fewer engineers over the subsequent couple of years.

Mainly, Adobe might be able to both reduce or rationalize all of Figma’s working bills over time, which implies Figma’s 90% gross margin may truly be nearer to its working margin when positioned within Adobe.

Seen in that mild, Adobe is de facto paying a a number of of post-synergy earnings. Assuming a 90% working margin on $400 million of revenues with a 21% tax price, Adobe is de facto paying nearer to 70 to 77 instances Figma’s post-synergy earnings of round $285 million.

Would a development investor pay 70 instances earnings for a corporation rising earnings at a 100% clip? Whereas not precisely a cut price, contemplating valuations for a lot of publicly traded and unprofitable software program firms, that really appears nearly downright low-cost.

Adobe believes the transaction might be accretive to earnings per share beginning within the third 12 months after closing. Given Figma’s development and margin profile, that looks like a fairly believable final result. 

An added bonus can be if the deal can generate significant income synergies as nicely, by which Adobe would promote extra of its merchandise to Figma’s consumer base or speed up Figma’s already-impressive development by way of its established gross sales channels.

Adobe’s inventory is now starting to look attention-grabbing

Adobe had been an costly inventory over the previous few years, however its P/E ratio has now fallen to beneath 30 — the bottom degree since 2013. Strikingly, Adobe’s market cap has fallen by some $35 billion for the reason that Figma announcement — greater than the $20 billion acquisition worth!

For traders searching for development at an inexpensive worth, they might need to take a look at Adobe’s inventory right this moment. Whereas the success of Figma is not assured, the potential for this truly being a very good acquisition, mixed with Adobe’s inventory having fallen almost 25% in every week, actually has this investor’s consideration.

Suzanne Frey, an government at Alphabet, is a member of The Motley Idiot’s board of administrators. Randi Zuckerberg, a former director of market improvement and spokeswoman for Fb and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Idiot’s board of administrators. Billy Duberstein has positions in Alphabet (C shares) and Meta Platforms, Inc. His shoppers could personal shares of the businesses talked about. The Motley Idiot has positions in and recommends Adobe Inc., Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., and Snowflake Inc. The Motley Idiot recommends the next choices: lengthy January 2024 $420 calls on Adobe Inc. and quick January 2024 $430 calls on Adobe Inc. The Motley Idiot has a disclosure coverage.

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