TechCrunch Disrupt 2022 - Day 3

Kimberly White

What happened?

Software giant Adobe (NASDAQ:ADBEThe company () released pedestrian earnings on September 15, 2022 and dropped a bombshell to the market. The company announced that Figma, an online design company, was being acquired for $20 billion. This amount is approximately half in cash and the other half in stock.

Figma, a cloud-based design tool, is directly comparable to Adobe XD. Figma is preferred by many professionals due to its superior collaboration functionality. Figma can be edited by multiple users in real-time, much like Google Docs (GOOG, GOOGL). For more information, click here check out this link.

The stock was already down by 35% compared to the year prior to the announcement. It cratered upon the news, as shown below.

Data by YCharts

Numerous analysts were quick to lower price targets, and reduce ratings. As these were rolled in, the stock was already trading below $300 per share. In late September, the stock fell to $275 per shares for its 52-week lowest point.

After researching the stock’s value and the nuances surrounding the Figma acquisition, my average position was near-full with an average cost per share of $287. This seems to be a good prediction after last week’s rally. However, the rally could quickly stall and this is a long term play.

Long-term investors who are able to see the long-term consequences of Figma joining Adobe stock could be attracted by another dip in Adobe stock. Dollar-cost averaging could be a smart choice, as the price is still historically low despite the rally.

Here are three compelling reasons to consider the Figma acquisition.

Reason #1: The Microsoft Dilemma

Microsoft (MSFTAdobe and ) have enjoyed a long-standing relationship. Both are amongst the top software companies worldwide by market capital. Although they may be rivals, Microsoft has been an Adobe customer for many years. They have also formed strategic partnerships and integrated over the years.

Figma is used by Microsoft employees since years. they LOVE it. Integration with Microsoft Teams app was also added recently.

Figma’s customer list includes a wide range of tech companies, including Netflix (NFLX) to Spotify (SPOT) to Alphabet.

This lens reveals the decision to buy Figma for $20 Billion.

  1. Adobe cannot afford to allow Figma a space infringement, especially with the expected 100% revenue growth for 2022.
  2. Microsoft is not a stranger to large-scale acquisitions. Microsoft’s recent purchase of Activision Blizzard, worth $69 billion, is an example.ATVI) is under regulatory review. Adobe may not buy Figma from another software company, which could adversely impact Adobe’s future profits.
  3. Figma could be listed. In 2021, Figma was valued at $10 billion. It would likely attract even more investors during an IPO and become an extremely well-funded competitor to Adobe’s creative space.

Although $20 billion seems high, it may be worth more to do nothing.

Reason #2: Figma

Figma didn’t get a $10 billion valuation in 2021. It is a phenomenal product by all accounts. It is expected that it will surpass $400 million in annual revenue (ARR), based on 100% sales growth and a 95% gross margin in 2022. Its staggering 150% net retention rate shows that the company is on the verge of rapid growth.

Figma is also cash flow positive, so it won’t be a drain of resources. Although the $20 billion price may seem absurd now, it could be a bargain in five.

Reason #3: Purchase Vs. Develop

Companies spend billions researching and developing (R&D) new products. Internal R&D is costly, and there is no guarantee that successful products will develop. Adobe has spent $8.9 billion on R&D since 2019. Sometimes, buying a pre-made product at a premium cost is the best option.

Salesforce (CRMThis is an excellent example of a company that successfully builds out acquisitions. Slack, MuleSoft, Tableau, and many other acquisitions have been made by the company. Salesforce successfully grew each division’s worth beyond the initial purchase price after making the investments.

The Figma acquisition will comprise about half cash and half stock, as previously mentioned. Adobe has $8.5 billion of current assets and $5.5 billion in cash from operations.

Although the acquisition will require short-term financing, it won’t leave the company with a lot of long-term debt. Adobe has repurchased $4.8 Billion in shares this year so shareholders aren’t left out.

Adobe stock valuation

Adobe stock prices have fallen due to negative sentiment. Long-term investors may be able to take advantage of the potential recession and pessimism surrounding the acquisition.

As shown below, the stock is at its highest percent-off high decline in ten year.

Data by YCharts

The last time stock was this low was during the financial crisis. As you can see, the stock recovered in both cases.

Data by YCharts

Recovery doesn’t happen overnight. This is why it is important to make this a long-term strategy. New lows could occur before new highs. Dollar-cost average is a powerful tool.

Adobe is also discounted based upon historical multiples. The price-to–earnings (P/E), as well as the price-to–cash flow metrics, tell similar stories.

Data by YCharts

Adobe’s market capital has been reduced to $20 billion since the Figma announcements. Adobe can be bought by new investors at a discounted acquisition price.

These metrics all point to a hugely positive risk/reward ratio for long-term investors.

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