October 5, 2022

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Opinion: Adobe's stock has been attacked for spending $20 billion on Figma.  But she now owns a rare company.

Opinion: Adobe’s stock has been attacked for spending $20 billion on Figma. But she now owns a rare company.

Adobe beat revenue and profit forecasts, and on the same day announced that it would acquire a smaller but faster-growing competitor in online design collaboration tools. The stock market rewarded the company by pushing its shares down ADBE,
-3.12%
to its lowest level in nearly three years.

Investors didn’t punish the company for its earnings report, which was released Thursday, but for their disdain for the Figma deal. Specifically, the bargain price.

Read: Nervous investors are critical of technical deals. Just look at Adobe.

In a $20 billion half-cash, half-stock deal, Figma became the largest multi-cloud scale SaaS transaction ever executed. Estimated revenue of $400 million for 2022 points to this deal about 50 times revenue this year in what I believe is the second largest as a service deal in history.

In this market, where growth is persona non grata, the market considered this deal as a bridge too far. However, in this case, the market may have gotten it wrong.

Figma is among the fastest growing companies

If you’re not familiar with Figma, it’s a project-backed company (pre-Thursday) that makes collaboration tools used for digital experiences. While Figma was founded in 2011, the first five years were spent trying to get into the product. The company printed its first dollar in revenue in 2017 and will reach $400 million in annual recurring revenue (ARR) in 2022.

For those unfamiliar with the economics of SaaS, achieving $400 million in recurring revenue in just over 10 years is great. However, doing so five years after your first dollar of revenue is impressive.

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For reference, the average cloud-scale SaaS company is booking $10 million in revenue after about 4.5 years, according to Kimchi Hill. In the same study, evaluating more than 72 SaaS companies that reached $100 million, only eight companies did so in less than five years from the first dollar—and that was exactly $100 million. Most take five to 10 years to reach $100 million, well-known names such as DocuSign DOCU,
-6.14%And the
Coupa COUP,
-4.28%And the
RingCentral RNG,
-5.34%
and Five9 FIVN,
-4.22%
It took 10 to 15 years.

In addition to its rapid growth, the company also operates in a way that should have been praised by at least the most savvy investors. A net customer retention rate of 150%, gross margins of 90%, high organic growth, and positive operating cash flow make it more than what investors in the company want today. Adobe is already growing in double digits, playing in attractive markets, collecting ARR, and at this point, it’s seen its multiples pull back from their all-time highs.

It’s also worth considering how Figma can leverage Adobe’s strong market position, well-known set of products and specific channels, and go-to-market strategies to accelerate its growth in this space with a total addressable market of approximately $16.5 billion.

Rare companies are still rare

Maybe it’s as if I’m gushed about this deal. I want to make it clear that I am not. At least not yet.

However, the mind of the cell in the market can be quite confusing at times, and there’s a data-driven story here justifying Adobe’s decision to buy Figma at such an exorbitant price. Unfortunately, we won’t know for sure for five or even 10 years. Investors may not like it, but Adobe’s longevity depends on the long-term business in mind.

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Tough economy or not, rare companies are still scarce, and Figma navigates market conditions and grows into a large market, attracting Adobe at an unprecedented price. It may or may not be overpaid.

However, based on rapid revenue growth, strong net dollar retention, 100% growth rate in 2022, massive margins and clear synergies across Adobe’s portfolio, Adobe may be the one to finally laugh at this.

Daniel Neumann is Principal Analyst atfuture research, which provides or has provided research, analysis, advice, or advice to Adobe, Five9, and dozens of other technology companies. Neither he nor his company holds any stock positions in the mentioned companies. Follow him on TwitterTweet embed.