Opinion: Adobe stock slammed for spending  billion on Figma.  But company ownership is rare now.

Opinion: Adobe stock slammed for spending $20 billion on Figma. But company ownership is rare now.

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

Investors punished the company not because of its earnings report, released on Thursday, but because of its disappointment in the Figma market. Specifically, market price.

Read: Investors are nervous about slamming technology markets. Look at Adobe.

In a half-stock, half-money, $20 billion transaction, Figma became the largest cloud-scale SaaS deal ever made. With an estimated revenue of $400 million for all of 2022 this market is about 50 times this year’s revenue and I believe it is the second largest software as a service market in history.

In this market, where growth is persona non grata, the market considered this market to be a bridge too far. However, in this case, the deal may be wrong.

Figma is among the fastest growing companies

If you’re not familiar with Figma, it’s a red-hot, venture-backed (before Thursday) company that makes collaboration tools used for digital experiences. Although Figma was founded in 2011, the first five years were spent trying to get the product off the ground. The company posted its first dollar in revenue in 2017 and will hit $400 million in annual recurring revenue (ARR) in 2022.

For those unfamiliar with SaaS economics, achieving $400 million in recurring revenue in just over 10 years is remarkable. However, doing so five years from the first dollar of income is even more impressive.

For reference, the cloud-scale SaaS company adds $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 did it 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, and well-known names like DocuSign DOCU,
-6.14%,
CUP CUP,
-4.28%,
RingCentral RNG,
-5.34%
and Five9 FIVN,
-4.22%
took 10 to 15 years.

Beyond its rapid growth, the company is performing in a way that should be applauded by at least the wealthiest investors. Its 150% net customer retention rate, 90% gross margins, high organic growth and positive operating cash flow make it one of the things investors want in a company today. Adobe already grows in the double digits, plays in attractive markets, makes its compounds ARR and, at this point, has seen the multiplier come down to its peaks.

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

Uncommon companies are still rare

Maybe it sounds like I’m gushing over this deal. I want to be clear that I am not. At least not yet.

However, market sentiment can be very elusive at times, and there is a data-driven story here that justifies Adobe’s decision to buy Figma at such a high price. Unfortunately, we won’t know for sure for five or even 10 years. Investors may not like that, but Adobe’s longevity depends on working with the long term in mind.

Tough economy or not, rare companies are still rare, and Figma is transcending market conditions and delivering growth in a large market, pulling Adobe in at an unprecedented price. Perhaps higher than should, or could have, been paid.

However, based on its rapid revenue growth, strong net dollar retention, 100% growth rate in 2022, huge margins and apparent synergies across Adobe’s portfolio, Adobe may have the last laugh on this one.

Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advice or consulting to Adobe, Five9 and many other technology companies. Neither he nor his firm have any equity positions in the companies mentioned. Follow him on Twitter@danielnewmanUV.

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