Adobe beat revenue and profit expectations, and on the same day announced it would acquire a smaller but faster-growing rival in online design-collaboration tools. The stock market rewarded the company by pushing down its shares
to the lowest level in almost three years.
Investors punished the company not for its earnings report, released Thursday, but for their disdain of the Figma deal. Specifically, the deal’s price.
In a $20 billion half-cash, half-stock transaction, Figma became the highest-multiple cloud-scale SaaS deal ever done. An estimated $400 million in revenue for all of 2022 marks this deal at around 50 times this year’s revenue in what I believe to be the second-largest software as a service deal in history.
In this market, where growth is persona non grata, the market deemed this deal a bridge too far. However, in this case, the market may have gotten this wrong.
Figma is among the fastest-growing companies
If you aren’t familiar with Figma, it’s a red-hot, venture-backed (before Thursday) company that makes collaboration tools used for digital experiences. While Figma was founded in 2011, the first five years were spent trying to get to product. The company printed its first dollar in revenue in 2017 and will hit $400 million in annual recurring revenue (ARR) in 2022.
For those who aren’t familiar with SaaS economics, hitting $400 million in recurring revenue in just over 10 years is remarkable. However, doing so five years from the first dollar of revenue is even more impressive.
For reference, the average cloud-scale SaaS company books $10 million in revenue after about 4.5 years, according to Kimchi Hill. In the same study, assessing more than 72 SaaS companies that reached $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 10 years to hit $100 million, and well-known names like DocuSign
took 10 to 15 years.
Beyond its speedy growth, the company is also performing in a way that should have been lauded by at least the savviest of investors. Its 150% net customer retention rate, 90% gross margins, high organic growth and positive operating cash flow make it more of what investors want in a company today. Adobe already grows in the double digits, plays in attractive markets, compounds ARR and, at this point, has seen its multiple come way down off its highs.
It is also worth considering how Figma may benefit from Adobe’s strong market position, known product portfolio and defined channels, and go-to-market strategies to speed its growth in this space with a total addressable market of about $16.5 billion.
Rare companies are still rare
Perhaps it sounds as if I’m gushing over this deal. I want to be clear that I am not. At least not yet.
However, the hive mind of the market can be quite perplexing at times, and there is a data-driven story here that justifies Adobe’s decision to buy Figma at such a lofty price. Unfortunately, we won’t know with any certainty for five or even 10 years. Investors may not like that, but Adobe’s longevity depends on operating with the longer term in mind.
Tough economy or not, rare companies are still rare, and Figma is traversing market conditions and delivering growth in a large market, drawing Adobe in at an unprecedented price. Perhaps higher than it should have, 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, it may be Adobe that has the last laugh on this one.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising or consulting to Adobe, Five9 and dozens of other technology companies. Neither he nor his firm holds any equity positions in companies cited. Follow him on Twitter @danielnewmanUV.