The ongoing rage of investors against Adobe (NASDAQ: ADBE) is an emerging opportunity. Look, wait and jump. Shares of this leading SaaS company fell from $318 to under $290 in less than 10 days.
Figma’s Estimated Gross the turnover for the 2022 financial year is $400 million. Management valued Figma at 50x price/sales. ADBE’s Price/Sell valuation is less than 8x. Figma’s rebellion-inciting buyout will eventually give ADBE a C+ valuation rating soon. Be grateful for this negativity from investors.
This acquisition will force Adobe to increase its debt by $4.64 billion. Adobe’s total cash is only $5.76 billion. My fearless assessment is that ADBE will end 2022 with shares of $300. Most investors are emotional. The negativity on the ADBE will eventually evaporate.
Why the negativity?
Many are infuriated by management’s costly $20 billion gamble to remove Figma as a rival. Figma’s valuation last year was just $10 billion. Programmers hired by Adobe could have created clones of Figma’s two popular browser-based collaborative products for less than $1 billion. The main $15/month Figma software below convinced me that it’s easy to clone using C++ or C# and WebAssembly.
Adobe XD UI/UX desktop product at $9.99/month could be redeveloped through Rust, C# C++ programming languages. After which, Adobe XD could be transformed into a browser-based Figma rival via WebAssembly. Adobe XD, only for desktop PC, holds 14.99% market share in global collaborative design and prototyping software. Figma has 31.41%.
Adobe buys the best performing UI/UX software and its customers. By next year, Adobe will hold nearly 70% market share of the global collaborative design software industry. The global global collaboration software market was worth $21.69 billion last year. Its estimated CAGR to 2030 is 9.5%.
Browser-based collaborative design is the way to go. I’m sickly but still involved in the graphic design and content creation industry. I’m still using my old $599 Adobe Photoshop CS6, but I’m no longer subscribed to any Adobe Creative Cloud products.
The browser-based donware and Photopea is a good alternative to Photoshop CC at $9.99/month. Figma’s pen tool and Boolean operations feature also convinced me not to pay for Illustrator CC at $19.99/month. The browser-based vector drawing application, Vectr, is decent enough for creating 2D mobile/web video game assets.
Adobe’s $15.7 billion-a-year SaaS business is under threat from browser-based software products.
Figma and the $5/month FigJam could well help Adobe hit $20 billion in annual sales by 2024. FigJam is whiteboard software. Adobe will share the $1.7 billion fast-growing (18.36% CAGR) collaborative whiteboard software opportunity.
The graphic designer market is worth $45.8 billion (print/digital). Owning Figma keeps these highly paid graphic designers/content creators under the Adobe Creative Cloud umbrella. Adobe XD will likely be killed off quickly. It will be replaced by an Adobe Figma at $19.99/month next year. The $20 billion Figma will consolidate Adobe’s mainstream graphic design and UI/UX/prototyping products like Illustrator CC, Photoshop CC, and Premiere CC.
Unless shareholder activists go to court, Adobe cannot reverse the $20 billion acquisition. The myopic herd mentality will continue to push ADBE down from the 52-week high of $699. Quantitative AI gives ADBE a momentum rating of D. The stock’s 30-day performance is -31.52%.
Let others be outraged that Figma is Adobe’s most expensive acquisition to date. The $20 billion price tag (50% cash, 50% ADBE stock) could be more than what Adobe has spent on its previous 55 acquisitions. The Figma deal is far more expensive than the $3.4 billion (all shares, no in-game money) Adobe paid for Macromedia. Figma offers two browser-based products. Macromedia had dozens of products. Its revenue for fiscal 2004 was $369.8 million. Adobe bought Macromedia at less than 9x price/sales.
Technical indicators also indicate that the ADBE is heading for more declines. The RSI score for this stock is 19.91. ADBE is under Oversold Buried. This means that the RSI score is below 30 for the last 3 trading days and signifies a short-term bearish alert.
The pessimism towards ADBE could deepen as emotional investors start to fear that model-based graphic design platform Canva is touting a market valuation of $40 billion in 2021. Canva’s freemium line caters to customers on a budget who can’t afford graphic designers. Canva therefore undermines the appeal of Adobe software products for customers on a tight budget.
Adobe already has a freemium browser-based rival against Canva. It’s called Adobe Express (created from the old AI-based mobile app Adobe Spark). I haven’t tried Adobe Express, but hopefully they have retained the AI-based procedure for creating multiple versions of a model-based design.
The $20 billion bet on Figma is worth it. It’s never cheap to buy a competitor with superior/better products. The most compelling reason to go long on ADBE is its high profitability. Extensive use of browser-based collaborative design software could improve ADBE’s 28% TTM net revenue margin.
This high profitability is due to Adobe’s derogatory dominance over the graphic design software industry. With Figma under its thumb, subscription-only Adobe products are now available for any computing device that can run Google (GOOG) (GOOGL), Firefox, Microsoft (MSFT) Edge, Windows, macOS, Android, and iOS.
Buying out the competition means Adobe won’t have to worry about increasing its monthly subscription fees. Adobe will permanently remove these free but limited Figma plans. They will be replaced by a 7-day free trial option. In the past, Adobe offered a 30-day trial for all of its products.
It is clear that the ADBE remains an effective and safe growth stock. His Piotroski score is 6 and the average 5-year beta is 1.13.
Do not panic, the moats of Adobe have no leaks. Figma and FigJam bolster Adobe Creative Cloud’s dominant appeal in the $45.8 billion designer market.