Adobe's stock has come under fire for spending $20 billion on Figma.  But he now owns a rare business.

Adobe’s stock has come under fire for spending $20 billion on Figma. But he now owns a rare business.

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

Investors punished the company not for its earnings report, released Thursday, but for their disregard for the Figma deal. Specifically, the transaction price.

Lily: Nervous investors slam tech deals. Look at Adobe.

In a $20 billion, half cash, half stock deal, Figma became the highest-ever cloud-scale SaaS deal. An estimated $400 million in revenue for all of 2022 puts this deal at about 50 times this year’s revenue in what I believe is the second-largest software-as-a-service deal in the story.

In this market, where growth is persona non grata, the market viewed this deal as a bridge too far. However, in this case, the market may have been wrong.

Figma is among the fastest growing companies

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

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

For reference, the average cloud-scale SaaS company achieves $10 million in revenue after about 4.5 years, according to Kimchi Hill. In the same study, evaluating more than 72 SaaS companies that hit $100 million, only eight did so in less than five years from the first dollar — and that was precisely $100 million. Most take five to ten years to reach $100 million, and well-known names like DocuSign DOCU,
Ring Central RNG,
and Five9 FIVN,
took 10 to 15 years.

Beyond its rapid growth, the company is also operating in a way that should have been welcomed by at least the savviest investors. Its 150% net customer retention rate, 90% gross margins, high organic growth and positive operating cash flow make it more of what investors expect of a company today. Adobe is already experiencing double-digit growth, playing in attractive markets, composing ARR, and at this point has seen its multiple drop far from its highs.

It is also worth considering how Figma can benefit from 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 market addressable total of approximately $16.5 billion.

Rare companies are still rare

Maybe I look like I spring from this case. I want to make it clear that I am not. At least not yet.

However, the hive mind of the market can be quite confusing 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 ten years. Investors may not like it, but Adobe’s longevity hinges on its longer-term operation.

Tough economy or not, rare companies are still rare, and Figma cuts through market conditions and generates growth in a large market, attracting Adobe at an unprecedented price. Perhaps more than he should or could have paid.

However, based on its rapid revenue growth, strong net dollar retention, 100% growth rate in 2022, massive margins, and apparent synergies across the Adobe portfolio, maybe it’s be Adobe who has the final say on this one.

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

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