Adobe Inc. (NASDAQ:ADBE)
Adobe stock took a beating last week, plummeting 24% from Monday through Friday after the company announced that it would purchase Figma, an online design platform with annual revenues of $400 million, for $20 billion (i.e., 50 times sales).
Adobe Stock has dropped further into the new week, down 1.7% as of 12:05 p.m. ET, as a steady stream of negative analyst notes on the deal has continued.
Whats the Reason?
Shares of Adobe were downgraded by Wells Fargo and Edward Jones to equal weight and hold, respectively, with the Figma acquisition being cited as a primary reason.
When Adobe announced its intention to acquire Figma for $20Bn, it rocked the software world, as Wells put it. Banker admitted strategic fit but questioned Adobes offer for Figma. A substantial premium, as Edward Jones put it, is reflected in the asking price.
If thats the case, then why did Adobe pay for it? Thats where these notes really shine, though. Wells claims that Adobe paid such an obviously inflated price for Figma, demonstrating the existence of a competitive process in which other corporations competed with Adobe for ownership of Figma. Then growing rivalry on the digital media side of the business [will] only escalate, as Adobes CEO warned investors.
Whats wrong with that? Its worth noting that Adobes revenue grew by 23% year-over-year as the economy began to recover from the global financial crisis last year. The sales growth rate from last year has been cut to 12% over the first three quarters of this year. Earnings growth has also been stymied, falling by 8% in 2020 and again this year compared to 2021, albeit by a far smaller margin.
Even though acquiring fast-growing Figma could boost Adobes growth rate and give it an edge over competing software companies, the companys profitability is likely to take a hit due to the enormous purchase price paid, which is equal to one-seventh of Adobes own market capitalization and six times its price-to-sales (P/S) ratio. Especially if Adobe has to admit it overpaid and write down goodwill from the Figma transaction in the future, this could be the case.
However, the fact that Adobe was willing to spend so much on a company that didnt even exist a decade ago demonstrates the dynamic nature of the software market and the possibility that any benefits Adobe may have won with its $20 billion investment may not remain.
One thing is evident Adobe stock paid too much for Figma. But could the situation really be much direr than that?
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Author: Shariq Khan
Market Jar Media Inc.
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Vancouver, BC, Canada