Adobe beat revenue and earnings expectations and announced on the same day that it would acquire a smaller but faster-growing competitor in online design collaboration tools. The stock market rewarded the company by sending its shares lower
to the lowest level in almost three years.
Investors chastised the company not for its earnings report on Thursday, but for their neglect of the Figma deal. More precisely, the price of the transaction.
In a $20 billion half-cash, half-equity transaction, Figma became the largest cloud-scale SaaS deal ever made. An estimated $400 million in full-year 2022 revenue marks this deal at about 50 times this year’s revenue in what I believe is the second largest software-as-a-service deal in history.
In this market, where growth is persona non grata, the market saw this deal as a bridge too far. In this case, however, the market may have been wrong.
Figma is among the fastest growing companies
If you’re not familiar with Figma, it’s a hot venture-backed (pre-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 the product off the ground. The company printed its first revenue dollars in 2017 and will reach $400 million in annual recurring revenue (ARR) in 2022.
For those unfamiliar with the SaaS economy, reaching $400 million in recurring revenue in just over 10 years is remarkable. However, to do it five years after the first dollar of revenue is even more impressive.
For reference, the average cloud SaaS company records $10 million in revenue after about 4.5 years, according to Kimchi Hill. In the same study, evaluating more than 72 SaaS companies that reached $100 million, only eight did so in less than five years from the first dollar—and that’s exactly $100 million. Most take five to 10 years to reach $100 million, as do well-known names like DocuSign
it took 10 to 15 years.
In addition to its rapid growth, the company is also performing in a way that should be praised by at least the smartest investors. Its 150% net customer retention rate, 90% gross margin, high organic growth and positive operating cash flow make it more than what investors want from a company today. Adobe is already growing by double digits, playing in attractive markets, compounding ARR, and at this point has seen many of their numbers fall far from their highs.
It is also worth considering how Figma can take advantage of Adobe’s strong market position, renowned product portfolio and defined channels and go-to-market strategies to accelerate its growth in this space with a total addressable market of around 16.5 billion dollars.
Rare companies are still rare
It might sound like I’m getting excited about 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 confusing at times, and there is a data-driven story here that justifies Adobe’s decision to buy Figma at such a high price. Unfortunately, we won’t know for sure in five or even 10 years. Investors may not like this, 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 overcoming market conditions and delivering growth in a large market, snapping up Adobe at an unprecedented price. Perhaps higher than should or could have been paid.
However, based on rapid revenue growth, strong net dollar retention, 100% growth rate through 2022, huge margins and obvious synergies across Adobe’s entire portfolio, Adobe may be having the last laugh on this one.
Daniel Newman is the principal analyst atFuture Research, which provides or has provided research, analysis, advice or consulting to Adobe, Five9 and dozens of other technology companies. Neither he nor his company owns equity positions in the companies cited. Follow him on Twitter@danielnewmanUV.