Opinion: Adobe stock has been criticized for spending $20 billion on Figma. But it now owns a rare company.

Opinion: Adobe stock has been criticized for spending $20 billion on Figma.  But it now owns a rare company.
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Adobe beat sales and profit expectations and on the same day announced it would acquire a smaller but faster-growing competitor for online design collaboration tools. The stock market rewarded the company by pushing its shares lower

to its lowest level in almost three years.

Investors didn’t punish the company for its earnings report released Thursday, but for their contempt for the Figma deal. In particular, the price of the deal.

Read: Nervous investors are slamming tech deals. Just look at Adobe.

In a $20 billion, half-cash, half-stock transaction, Figma became the cloud-scale SaaS deal with the highest multiplier ever. An estimated $400 million in revenue for all of 2022 marks this deal at about 50 times this year’s revenue, which I believe is the second-biggest software-as-a-service deal in history.

In this market, where growth is persona non grata, the market considered this deal too far. In this case, however, the market may have gotten this wrong.

Figma is one of the fastest growing companies

If you’re not familiar with Figma, it’s a brand new venture-backed (pre-Thursday) company that makes collaboration tools for digital experiences. While Figma was founded in 2011, the first five years were spent getting to grips with the product. The company achieved its first dollar revenue in 2017 and will reach $400 million in Annual Recurring Revenue (ARR) in 2022.

For those unfamiliar with the SaaS economy, it’s remarkable to have $400 million in recurring revenue in just over 10 years. But it’s even more impressive to do so five years after the first dollar of sales.

For reference, the average cloud-scale SaaS company posts $10 million in revenue after about 4.5 years Kimchi Hill. In the same study that evaluated more than 72 SaaS companies that hit $100 million, only eight did in less than five years from $1 – and that was exactly $100 million. Most take five to 10 years to reach $100 million and household names like DocuSign

and Five9

Lasted 10 to 15 years.

Aside from its rapid growth, the company is also developing in a way that should be applauded by at least the savviest of investors. Its 150% net customer retention rate, 90% gross margin, high organic growth, and positive operating cash flow make it more of what investors want in a company today. Adobe is already growing in double digits, playing in attractive markets, increasing ARR, and at this point has seen its multiple fall a long way from its highs.

It’s also worth considering how Figma can leverage Adobe’s strong market position, well-known product portfolio and defined channels and go-to-market strategies to accelerate its growth in this space, which has a total addressable market of approximately $16.5 billion .

Rare companies are still rare

Maybe it sounds like I’m gushing about this deal. I want to make it clear that I’m not. At least not yet.

However, market swarm awareness can be quite confusing at times, and here’s a data-driven story justifying Adobe’s decision to buy Figma at such a hefty price point. Unfortunately, we won’t know for sure for five or even ten years. Investors might not like it, but Adobe’s longevity depends on taking a longer-term view.

Tough economy or not, rare companies are still rare, and Figma traverses market conditions and delivers growth in a large market, attracting Adobe at an unprecedented price. Perhaps higher than it should have paid or could have paid.

However, given its rapid revenue growth, strong net dollar retention, 100% growth rate in 2022, massive margins, and obvious synergies across the Adobe portfolio, it may be Adobe who has the last laugh on this product.

Daniel Newman is the lead analyst atfuture researchthat provides or has provided research, analysis, advice, or consulting services to Adobe, Five9, and dozens of other technology companies. Neither he nor his company hold shares in the companies mentioned. Follow him on Twitter@danielnewmanUV.

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