SeanShot Thesis Adobe Inc.’s (NASDAQ:ADBE) acquisition of Figma, Inc. strengthens the company’s competitive positioning and follows their long-term strategy. Adobe’s valuation premium has come down considerably and the risk/reward looks attractive here. For these reasons, we believe Adobe is a buy. Figma Acquisition On September 15, 2022, Adobe announced their plans to acquire Figma. Figma is a design and collaboration platform for creatives. Adobe’s press release outlines the financial details of the deal: Under the definitive agreement, Adobe has agreed to acquire Figma for approximately $20 billion, comprised of approximately half cash and half stock, subject to customary adjustments. Approximately 6 million additional restricted stock units will be granted to Figma’s CEO and employees that will vest over four years subsequent to closing. Adobe expects the cash consideration to be financed through cash on hand and, if necessary, a term loan. The transaction is expected to close in 2023, subject to the receipt of required regulatory clearances and approvals and the satisfaction of other closing conditions, including the approval of Figma’s stockholders. $20 billion is a hefty price tag, especially for a company that is generating only $400 million in ARR. It is worth noting that Figma was valued at $10 billion in their most recent funding round, so Adobe paid a 2x premium to that already large valuation. This naturally leaves investors wondering whether or not the deal is worth it. We believe that the Figma acquisition is financially acceptable and brings in not only a quality asset in Figma, but also highly talented personnel to help Adobe improve their own products and act on their long-term strategy. The benefit of this acquisition is more of an intangible one than it is a purely financial move. In a document Adobe published along with their press release, they chose to describe Figma in the following way: Figma is a design platform for teams who build products together. Born on the web, Figma helps teams brainstorm, design, and build better products—from start to finish. Whether it’s consolidating tools, simplifying workflows, or collaborating across teams and time zones, Figma makes the design process faster, more efficient and fun while keeping everyone on the same page. This sounds similar to Adobe’s already existing product “Adobe XD.” Adobe plans to wind down their small XD team and transition all of those customers to Figma. The company is assuring the public that the Figma team will retain autonomy. This has drawn the scorn of cynics and creatives alike, however, in this case I believe that it is actually in Adobe’s best interest to uphold their assurance and give the Figma team not only autonomy, but a firehose of resources to use as they see fit. This is because the Figma team is just what Adobe needs to improve their competitive positioning and execute on their long-term strategy. Adobe’s Long-Term Strategy Adobe’s long-term strategy is to make their products both feature rich and easy to use. This will satisfy the needs of all creative customers and leave them without a reason to use a competitor’s software except for price. Adobe can adjust prices and feature availability as needed to better serve their target market and ensure that everyone gets what they want for an acceptable price. Figma excels at customer satisfaction and making a tool that is both powerful and easy to use. Adobe has consistently struggled to design products that are both feature rich and easy to use, which has given room for companies like Figma and Canva to flourish. Acquiring Figma will bring in highly valuable personnel that can continue to innovate regarding the core Figma product as well as improve Adobe’s other products. After all, these people are creatives themselves and have an outside looking in perspective that will allow them to be unbiased when fixing the flaws in Adobe’s products. This is natural; if you are an Adobe employee that made an unpopular feature, you would on average be less likely to remove it than an outsider because of an emotional attachment. For this reason, the Figma team should not only be allowed to remain autonomous in their core Figma endeavors, they should also be given more resources to create entirely new products. They should also be granted the ability to give input regarding Adobe’s core products. This way, Adobe can both improve their core products and create new products with ease of use being at the forefront, helping them to compete against current and future competitors. Valuation Adobe has traded at a rich valuation in the past. The market is beginning to doubt Adobe’s growth potential and the durability of their competitive advantage. The end result of this doubt is a lower multiple. That being said, we believe that this is an attractive valuation for long-term investors to buy Adobe Inc. shares. Data by YCharts Risks A major risk to this bullish thesis is if the Figma acquisition gets blocked by regulators. This is certainly possible (some might argue likely) and would damage the bull case. That being said, Adobe is a good company on their own and investors would simply be facing less upside potential should the acquisition get blocked. Another risk is the increasing popularity and usage of free tools such as Canva. These tools are well known for their simplicity and ease of use. While this is a major threat that needs to be respected by the company, there will always be the need for advanced creative tools, and for now Adobe provides the best solution for many creatives – just not the simplest. Investors should monitor whether or not the competition is able to create products that are as feature-rich as Adobe’s. Key Takeaway Figma strengthens Adobe Inc.’s competitive positioning and should improve their products over the long-run. The personnel that are joining Adobe will have an outsider perspective and will be able to improve the Adobe core products as well as innovate on new products. The addition of Figma into the Adobe portfolio should solidify the company’s product lines. Adobe Inc. is trading at an attractive valuation relative to the stability of their business and growth profile. For these reasons, we believe Adobe is a buy.
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