Adobe plummets 15% after $20 billion deal to buy Figma and as earnings reveal soft 4th-quarter guidance
- Adobe stock plunged 15% on Thursday after it announced a $20 billion deal to acquire Figma.
- Figma is a fast-growing collaborative design competitor that was last valued at $10 billion in 2021.
- Adobe expects the Figma deal to be accretive to its adjusted earnings per share after 3 years.
Adobe stock plunged as much as 15% on Thursday after the company announced a $20 billion deal to acquire privately held Figma and reported earnings that revealed a soft fourth-quarter outlook.
Figma is a fast-growing software company that offers collaborative design tools for businesses, directly competing with and taking market share from Adobe. A CNBC report revealed that tens of thousands of employees at Microsoft were heavily using Figma's cloud-based software platform, which tested its long-running relationship with Adobe.
Figma was founded in 2012 and was last valued at $10 billion in 2021. The company is expected to register more than $400 million in annual recurring revenue this year. Adobe will be funding its deal for Figma with a combination of both cash and stock.
"With gross margins of approximately 90 percent and positive operating cash flows, Figma has built an efficient, high-growth business," Adobe said in a press release. The company expects the deal to close in 2023, and said it expects the business combination to be accretive to its adjusted earnings per share after three years.
While Adobe's deal for Figma may make sense in the long-run, as it turns what was a fierce competitor into one of Adobe's new weapons for growth, investors aren't showing enthusiasm for the deal in the short-term.
Part of that could be due to Adobe's third-quarter results, which were also announced on Thursday. While the company beat adjusted EPS estimates, it gave fourth-quarter revenue guidance of $4.52 billion, which was short of consensus estimates for $4.59 billion.
Part of the decline could also be attributed to the uncertain macro environment, with elevated inflation leading to outsized interest rate hikes that often ding tech-oriented growth stocks such as Adobe. It could also be because, with such elevated interest rates, investors might think Adobe is overpaying for a software company that may not yet be profitable.
For perspective, while Figma's valuation has doubled from its last funding round of $10 billion to $20 billion today, nearly all other software companies, both public and private, have seen their valuations decimated due to investors' shifting focus to profits from growth.
Adobe CEO Shantanu Narayen doesn't agree with that sentiment.
"Adobe's greatness has been rooted in our ability to create new categories and deliver cutting-edge technologies through organic innovation and inorganic acquisitions. The combination of Adobe and Figma is transformational and will accelerate our vision for collaborative creativity," Narayen said.
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