Adobe Inc. shares were headed for their worst week since 2002 as investors and analysts continued to digest the record price the software company agreed to pay for startup Figma.
Chief Executive Shantanu Narayen told investors Thursday that the Figma deal will “significantly expand our reach and market opportunity,” but Wall Street analysts had questions about the purchase price for Figma, the timing of the deal, and whether it represented a massive change in Adobe’s acquisitive approach.
“Adobe has been a fairly prudent acquirer over the years, and very thoughtful about their acquisitions,” Baird analyst Rob Oliver told MarketWatch in an interview Friday. The company “tended not to pay dramatic multiples or premiums” and ran the business in a shareholder-friendly manner.
Figma fetched a $10 billion private-market valuation last year, so Adobe’s offer — which amounts to more than $20 billion when factoring in restricted-stock units and comes at a time when both public and private valuations have fallen — suggested urgency on the part of Adobe’s management to get a deal done, Oliver told MarketWatch. And that sense of urgency played into concerns that investors have had about Adobe’s competitive position, he continued.
With the Figma deal, though, you have a “valuation that’s stratospheric,” as well as a transaction that will weigh on margins for several years. “All those things are very concerning to investors,” he said.
Some of the pressure on Adobe shares could reflect an unwinding of sorts, in his view, as “people who were there for the current thesis” leave when that thesis changes. “Those unwind periods can be painful,” he said.
Adobe has been used to having a near monopoly on the market for creative software tools, but lately companies like Figma and privately held Canva have been making inroads, Oliver explained. While Adobe had a mainstay on the education market, allowing the company to hook users on its software early on, the “younger generation of creatives and collaborators are less beholden to that paradigm,” according to Oliver.
Executives at Adobe have been straightforward about competition, Oliver said, but they’ve also maintained that they could manage threats through products like Adobe Express and levers like pricing. The company’s expensive acquisition of a direct rival therefore raises questions for investors about Adobe’s real view of its competitive position.
“I’m by no means saying this deal won’t ultimately be successful,” and Figma could eventually prove a “seminal moment,” for Adobe, he continued. But such a deal in this market, with the message it sends about the company’s “absolute need” to do the transaction, “makes it very challenging for us to recommend Adobe stock.”
Oliver also noted a juxtaposition between Adobe and fellow software giant Salesforce Inc
Whereas Salesforce has a history of splashy deals like those for Slack, Mulesoft, and Tableau, Adobe had stuck mainly to tuck-in acquisitions and deals for companies that were “the worst house in a good neighborhood,” like commerce platform Magento.
“We have long been fans of Adobe’s organic vs. inorganic growth and profitability stewardship. That said, we believe that the dilutive impact to margins over the next few years, the price paid, and the overall macro pressures likely put Adobe shares in the ‘penalty box,’” Oliver wrote while downgrading Adobe’s stock to neutral from outperform in a Friday note.
Other analysts had similar doubts about Adobe’s latest deal, and investors seemed to agree. Adobe’s stock fell more than 4% in midday trading Friday to build on a 16%-plus decline sustained Thursday. Shares were down 25.8% on the week, putting them on track for their worst week since Aug. 2, 2002, when shares lost 28.7% in a five-day period, according to Dow Jones Market Data.
“While we believe that the strategic merits of the Figma acquisition make sense, it is difficult to justify the price (50x CY22 [annual recurring revenue]) or level of dilution in a market where software valuations are dropping almost daily,” Evercore ISI analyst Kirk Materne wrote. “We understand that transformative opportunities only emerge every so often, but the level of EPS dilution (2 years) and in-line results is a tough combination in an already tough market for software.”
RBC Capital Markets analyst Matthew Swanson also noted management’s bullishness on the deal, in combination with investor unease.
While Adobe’s management expects the deal to be accretive to earnings at the end of the third year, “investors remain skeptical about valuation with the acquisition being a significant premium to its last funding round of $10 billion in 2021, and raises the question of being more reactive/defensive vs. proactive/offensive, especially in a recessionary environment,” he wrote, while keeping an outperform rating on Adobe shares but trimming his price target to $425 from $500.
Of the 31 analysts tracked by FactSet who cover Adobe’s stock, 18 have buy ratings and 13 have hold ratings. That compares with 24 buy ratings and six hold ratings among 30 covering analysts as of the end of August. The average price target on Adobe shares is $401.58, per FactSet data, compared with $463.27 as of the end of August.
Adobe shares have lost 48% over the past three months as the S&P 500
has fallen 19%.