Adobe’s share price sank following the company’s latest results and a surprise deal to acquire a privately held software company called Figma.
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DADO RUVIC/REUTERS
For once, Adobe ADBE -17.01%
can be grateful it isn’t Microsoft.
The Silicon Valley pioneer behind well-known products like Photoshop, Illustrator and the ubiquitous PDF format has long lived in the shadow of some of its much larger software peers of a similar age. But Adobe is no runt: Projected revenue of a little over $20 billion for the next fiscal year ranks the company 10th on the S&P 500 Software & Services Group. And Adobe’s highly successful transition to a subscription-based business model has made it the largest company on the BVP Nasdaq Emerging Cloud Index by market capitalization, outranking even Salesforce.
That was until Thursday morning, when Adobe’s share price sank 17% following the company’s latest results and a surprise deal to acquire a privately held software company called Figma for $20 billion in cash and stock. That is more than four times what Adobe paid for Marketo in 2018, which had been by far the company’s largest deal ever. Analyst Brent Thill of Jefferies noted that the price also reflects a multiple of about 25 times what Figma’s annualized recurring revenue could hit next year if it keeps growing at its current rate. That compares with about 10 times forward revenue Adobe paid for Marketo. In a report Thursday morning, Mr. Thill concluded that Adobe’s latest move “looks pricey.”
It also looks like an established tech giant taking out a growing threat—a risky move in the current regulatory environment. Figma, which just turned 10 years old, offers cloud-based tools used by software designers in areas like user interface, thus competing with Adobe’s XD service. It has grown popular of late: A report by Macquarie Research earlier this year noted that “many designers pull Figma into their organizations like developer tools.” A report by CNBC last month said “tens of thousands” of software developers at Microsoft now use Figma as well—despite the availability of Adobe’s tools through an existing business relationship.
In a conference call Thursday morning, Adobe claimed the overlap isn’t as strong as it might seem as two-thirds of Figma’s users aren’t from the group of designers that make up Adobe’s core customer. But the move still comes at a time of weakness; Adobe’s fiscal third-quarter results Thursday showed a continued deceleration in the company’s growth. Revenue has grown by an average of 14% year over year over the past four quarters, compared with an average of nearly 25% over the previous four periods. And Adobe’s revenue forecast for the current fiscal quarter ending in November came below Wall Street’s target for the fourth consecutive period on Thursday. Adobe’s shares are now down 46% for the year compared with a 26% decline for the S&P 500 software group.
Figma on its own might not change that trajectory; $400 million in annual revenue is about 2% of what Wall Street expects Adobe’s revenue to hit next year. And, despite its growing heft, Adobe is still likely too small to have the deal raise alarm bells with regulators. But investors might still be justifiably worried that Adobe dug rather deep to fund an expensive cloud acquisition at a time when cloud companies are cheaper than they have been in years.
The Photoshop maker has its own image to brush up now.
Write to Dan Gallagher at [email protected]
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