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Market Insights

Adobe buys Figma for $20bn, Adobe shares fall 20%

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Stock of the week: Adobe

Big news at the end of last week for Adobe. The $20 billion acquisition of Figma, a web-based graphic design and user interface design app marks another step in Adobe’s mission to change the world through digital experiences. In the press release, they say that “the combination of Adobe and Figma will usher in a new era of collaborative creativity”.

That may well be the case, but the market didn’t seem to view this as a value add. Instead, Adobe's stock fell drastically. Since Monday the 12th of September, the stock fell by just over $100, from 393.68 to 293.57, before recovering slightly into Friday’s close.

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To put this into context, Adobe’s market cap on Monday was $185 billion. By Friday’s close it had dropped to $139.9 billion. That’s $45 billion of value lost after a $20 billion acquisition.

Now, some of the fall can be attributed to broader market sentiment. You may have heard that things are looking a little dicey in the global economy. Nonetheless, Adobe edged out Fedex and took the crown for worst large-cap performer last week, closing out at -24.13%. Fedex weren’t far behind, falling by -22.98%.

It’s reasonable to assess that this acquisition is a big part of the reason for the selloff. So, why did Adobe buy Figma and is it really such a disaster?

There’s definitely an argument that they overpaid. Figma’s 2021 revenue was $51.1 million. While that figure was expected to increase to $400 million in 2022, it’s a huge price tag.

However, is Wall Street too focused on the numbers, and missing the big picture? Figma’s collaboration capabilities were a glaring hole in Adobe’s business model. See, if you want to collaborate on a design project with Adobe, you have to deal in save files. Each user has to send files backwards and forwards, and manually load/open the latest updates from the team.

In the modern world, that’s practically archaic. Had Adobe addressed the flaw sooner, Figma might never have taken off. The popularity of the product is in no small part due to the real-time collaboration.

Adobe CFO Dan Durn explained how they view the deal:

“The combination will accelerate top-line growth for both Adobe and Figma based on three primary drivers,”

“One, we extend Figma’s reach to our customers and through our global go-to-market footprint. Two, Figma accelerates the delivery of new Adobe offerings on the web to the next generation of users. And three, we jointly introduce new offerings to the market as we unlock the possibilities of collaborative creativity.”

When questioned on the eye-watering fee, Durn responded that “You are paying for what they are going to do, not what they’ve done … We will accelerate that trajectory and redefine the future of work. It will be transformative.”

Critics will say that Adobe is merely buying out a competitor, but that doesn’t change the fact that they’ve done so while also plugging a sizable leak in the company moat.

On the surface, the deal makes sense. Is it really worthy of such a drop in Adobe’s share price?

Not investment advice. Past performance does not guarantee or predict future performance.

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