Software giant Adobe Inc. (ADBE) jolted investors and analysts with the announcement of the $20 billion Figma buyout deal. Investors and analysts are skeptical about the huge offering price for the little-known company, especially amid the unfavorable macroeconomic backdrop. Adobe’s third-quarter results also fell short of analysts’ expectations, further demotivating them.
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Following the news, analysts lowered their price targets on ADBE stock, while a few even downgraded the stock’s recommendation. Similarly, investors’ pessimism pushed ADBE shares to a new 52-week low of $292.14 on September 16.
Meanwhile, Adobe’s CEO Shantanu Narayen is highly optimistic about the deal and said in an interview, “Stronger companies are actually the companies that should be making the moves to position themselves to serve customers for decades… We really believe that the opportunity for us is to usher in this new world of collaborative creativity,” a WSJ report quoted.
Adobe specializes in software for the creation of graphics, animation, and digital marketing material. Figma, on the other hand, focuses on a collaborative tool for interface designing, a segment that Adobe has been trying hard to imbibe in its offerings. Figma is known to be fast and user-friendly and will add new users, including developers, to Adobe’s customer base.
Analysts’ Perception of the Figma Buyout Deal
Mizuho Securities analyst Gregg Moskowitz, who has a Hold rating on ADBE stock, slashed the price target to $360 (20.2% upside potential) from $440, following the weak quarterly performance and guidance and Figma buyout news.
Moskowitz believes the Figma acquisition may be strategically apt for Adobe but thinks the price is too high. The analyst noted that the $20 billion deal amount is almost 50 times Figma’s current Annual recurring revenue (ARR). Also, the amount is much higher than the $10 billion valuation pegged during the funding round last year.
Adobe projects that Figma will add around $200 million in ARR in 2022 while surpassing $400 million in the fourth quarter. Also, Figma is expected to be accretive to Adobe’s non-GAAP earnings per share (EPS) by the end of the third year. However, in the meantime, the deal will be 100-200 basis points dilutive to Adobe’s operating margin.
“This acquisition will make ADBE a lot more relevant in modern, browser-based design and collaboration. However, Figma also comes at a hefty purchase price, and we believe part of the motivation for the deal was defensive,” Moskowitz concluded.
Similarly, Robert W. Baird analyst Robert Oliver downgraded ADBE stock to a Hold rating from Buy. The analyst also cut the price target on the stock to $355 (18.5% upside potential) from $450, primarily owing to the overpricing of the Figma deal.
Oliver has been an admirer of Adobe’s organic and inorganic growth story and its ability to generate profits. However, the analyst is cautious about the dilutive impact on Adobe’s margins due to the buyout. Moreover, the high acquisition price and overall macro pressure on Adobe’s shares put him on the sidelines.
Furthermore, Oppenheimer analyst Brian Schwartz also downgraded ADBE stock to a Hold rating and removed the $400 price target he had before the Figma buyout news.
Although Schwartz has liked Adobe all along, he believes the company’s execution risk has been multiplied due to Figma’s acquisition.
“Given current execution woes, investors are likely going to be skeptical that a turnaround in business momentum will be a near-term event, rather, that it will take multiple quarters to be credible. We, therefore, see few near-term catalysts and move to the sidelines on Adobe,” the analyst concluded.
What is the Target Price for Adobe Stock?
Following a series of analyst downgrades and price target cuts, ADBE stock has a Moderate Buy consensus rating on TipRanks. The average Adobe price target of $380.68 implies 27.1% upside potential to current levels. Meanwhile, the stock has lost 46.9% so far this year.
Parting Thoughts
Adobe’s move to acquire Figma may undoubtedly benefit the company in the long run. However, the lack of near-term catalysts and the execution risks following the acquisition are pushing the analysts to the sidelines. The challenging macroeconomic headwinds coupled with the overpriced deal have turned the analysts’ views pessimistic. Investors may prefer to wait on the sidelines until more clarity on the company’s trajectory is sought.
