Why Adobe Wants Figma and Why Some Investors Are Worried

Why Adobe Wants Figma and Why Some Investors Are Worried

Adobe Inc.,

ADBE -3.12%

the low-key maker of digital tools for creating PDFs and editing photos has delighted investors by reinventing itself as a subscription software business. His latest attempt to keep up with the times isn’t landing as well.

Last week Adobe unveiled its biggest acquisition ever, agreeing to buy Figma, a little-known software startup that specializes in helping digital creators collaborate. The deal’s $20 billion price tag rattled investors and raised questions among analysts about the health of Adobe’s business.

Tools for editing and manipulating photos and videos are in high demand, with people creating visual content like never before. Since the pandemic began, designers have been collaborating more and more remotely, relying on digital tools to do so. This fueled the demand for new applications, leading to Australian-based startups such as Figma and Canva.

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Adobe, the biggest competitor in the design software market by sales, has struggled to capitalize on that enthusiasm and is starting to feel the impact. The company on Thursday announced quarterly results that showed a continued slowdown in revenue growth and issued guidance that fell short of Wall Street expectations. Sales of new annual subscriptions tied to the Creative Cloud service including functions such as its well-known Photoshop suite were slightly shy of the company’s earlier projection.

Adobe products like Photoshop and Illustrator are almost essential for people who design marketing materials and magazines. But some users have complained on social media and elsewhere that the products are difficult to use and lack the collaboration features available with Figma and elsewhere.

“Figma is fast, small and sleek,” said Daniel Vinci, who runs an independent website design firm, saying he and his clients have adopted the startup’s tools for the ease of working together on projects. digital. “Anyone can pick it up and start working. No Adobe product works like that,” he said.

Adobe said it is constantly modernizing its products and has introduced collaboration features in recent years.

Figma’s appeal to users like Mr. Vinci helps explain why Adobe was willing to pay 50 times the smaller company’s expected annual recurring revenue for 2022, and double the valuation it received in a funding round last year.

“The buying is at such a nosedive level that it raises concerns about what is happening under the covers with the core business,” said Brian Schwartz, senior analyst at investment firm Oppenheimer & Co.

Adobe CEO Shantanu Narayen, shown at a company event in 2019, says the current weak economic backdrop provides the right time for the company to act.


Photo:

Jeff Bottari/Associated Press

Adobe shares retreated nearly 17% on Thursday after the announcement and another 3.12% on Friday. The stock is down about 47% this year, underperforming the broader market.

Adobe CEO Shantanu Narayen defended the acquisition as “transformational,” adding to calls from analysts that big deals are often viewed with skepticism.

The current weak economic background, he said, made the time right for the company to act.

“Stronger companies are the companies that should be moving to position themselves to serve customers for years,” Mr. Narayen said in an interview. “We really believe that this is the opportunity for us to seize this new world of collaborative creativity.”

Mr. Narayen’s ability to buy Figma at that price depends largely on his success in transforming Adobe a decade ago. Mr Narayen took over the company in 2007 when he sold its software to users, usually on discs. But the software business was changing as the field of cloud computing grew which led to the sale of such products online, as a service and on a subscription basis.

In 2011, Mr. Narayen embraced the transition, positioning Adobe as the rare software provider to adapt to the emerging sales model that is now ubiquitous. The company had about $4.2 billion in annual sales at the time. It now generates more than that in a quarter. Adobe grew into a software giant with a market value of $320 billion at its peak last year and its stock had advanced 10 times over the past decade before the Figma deal was announced.

During Adobe’s move to the cloud, naysayers, too, questioned the company’s strategy, Mr. Narayen said. “Everybody focuses on the small number of people who have questions whenever change happens, but the believers are the ones you want to prove right,” he said.

Other software powerhouses were slower to adapt. Oracle Corp.

, the major database software provider, has for many years downplayed the importance of cloud computing and is now spending heavily to expand those activities. International Business Machines Corp.

likewise it was slow to move to the cloud and then it spent about $34 billion in 2019 to buy Red Hat Inc. get to strengthen their presence in the market.

Adobe executives say the Figma purchase will spark a new era of growth. “This positions the company to define new categories and drive growth for years to come,” said Chief Financial Officer Daniel Durn.

Figma, Adobe said, would also help it tap a new user base. The company says that in addition to the designer community that already uses its tools, Figma will bring in developers and others who might not normally be its customers.

To dispel doubts, Mr. Narayen said, the company would also focus on demonstrating strength in its core business.

The deal, which has yet to pass regulatory scrutiny and is otherwise set to close next year, would add collaboration features to Adobe products that the company has struggled to build on its own. In 2016, Adobe launched a collaborative design tool, but it didn’t gain traction in the market, said Scott Belsky, Adobe’s chief product officer, and the effort is largely over. Now, he said, Adobe plans to start making more of its design tools available inside Figma, such as image editing capabilities from Photoshop, to facilitate collaboration.

Figma users, however, are worried about the combination. Mr. Vinci, the freelance web designer who fell in love with the startup’s product, said he is currently looking at other options such as Dutch design software company Sketch BV.

Write to Aaron Tilley at aaron.tilley@wsj.com

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