Adobe missed revenue and profit expectations, and announced on the same day that it would acquire a smaller but fast-growing rival in online design-collaboration tools. The stock market rewarded the company by pushing its shares down
ADBE,
The lowest level in nearly three years.
Investors chastised the company not for its earnings report, released Thursday, but for its disdain for the Figma deal. Specifically, the contract price.
Read: Nervous investors are criticizing the tech deal. Just look at Adobe.
In a $20 billion half-cash, half-stock transaction, Figma became the highest-multiple cloud-scale SaaS deal ever made. An estimated $400 million in revenue for 2022 marks the deal at about 50 times this year’s revenue in what I believe is the second largest software as a service contract in history.
In this market, where growth is impersonal, the market saw the deal as a bridge too far. However, in this case, the market may get this wrong.
Figma is one of the fastest growing companies
If you’re not familiar with Figma, it’s a red-hot, venture-backed (pre-Thursday) company that makes collaboration tools used for digital experiences. When Figma was founded in 2011, the first five years were spent trying to get a product. The company printed its first dollar of revenue in 2017 and will hit $400 million in annual recurring revenue (ARR) in 2022.
For those unfamiliar with the SaaS economy, hitting $400 million in recurring revenue in just over 10 years is remarkable. However, making it 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, of more than 72 SaaS companies valued at $100 million, only eight did so in less than five years from the first dollar — and that was $100 million. Most take five to 10 years to reach $100 million, and well-known names like DocuSign
DOCU,
coupe
coup,
RingCentral
RNG,
and five9
FIVN,
It took 10 to 15 years.
Beyond its rapid growth, the company is performing in a manner that should at least have been appreciated by investors. Its 150% net customer retention rate, 90% gross margin, high organic growth and positive operating cash flow make it more of what investors want in a company today. Adobe has already grown in double digits, played in attractive markets, compounded ARR and, at the moment, has seen its multiples come down from its highs.
Figma is worth considering how it can benefit from Adobe’s strong market position, familiar product portfolio and defined channels, and go-to-market strategies to accelerate its growth in this space with a total addressable market of approximately $16.5 billion.
Rare company is rarer still
It probably sounds like I’m gushing over this deal. I want to be clear that I am not. Not now for now.
However, the market’s hive mind can be quite confusing at times, and here’s a data-driven story that supports Adobe’s decision to buy Figma at such a high price. Unfortunately, we won’t know with any certainty for five or even 10 years. Investors may not like it, but Adobe’s longevity depends on acting with the long-term in mind.
Tough economy or not, rare companies are still rare, and Figma is overcoming market conditions and delivering growth in a large market, taking Adobe to unprecedented value. Probably paid more than it should have or could have.
However, based on its rapid revenue growth, strong net dollar retention, 100% growth rate in 2022, huge margins and apparent synergies across the Adobe portfolio, it may be Adobe that has the last laugh.
Daniel Newman is the lead analystFuture research, which provides or provides research, analysis, advice or consulting to Adobe, Five9 and dozens of other technology companies. Neither he nor his firm has any equity position in the quoted company. Follow him on Twitter@danielnewmanUV.
