Adobe Stock (NASDAQ:ADBE): Figma Fears Overdone; Shares Oversold
Stock Analysis & Ideas

Adobe Stock (NASDAQ:ADBE): Figma Fears Overdone; Shares Oversold

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Shares of Adobe have been facing accelerating losses amid the market carnage and the $20 billion Figma deal. Though Adobe could have overpaid, the post-acquisition reaction seems absurdly overblown.

Shares of creative software kingpin Adobe (NASDAQ: ADBE) have been feeling the full force of the market’s latest leg lower. Undoubtedly, the pain was amplified due to the Figma deal that investors (and certain designers) immediately soured on. Since the deal announcement, the stock has shed around 25% of its value. Worse, shares are off about 60% from their all-time highs of about $700 per share.

The real question on investors’ minds is whether or not shares are undervalued. I think they are amid the market’s overreaction to higher interest rates and the sticker shock from the Figma deal, which, I believe, will blow over.

Adobe’s Figma Acquisition: Investors Feeling the Buyer’s Remorse

Figma is a collaborative UI (user interface) design application that’s won the hearts of UX (user experience) designers in recent years. Undoubtedly, Figma seems to be the perfect fit for Adobe, which has a wide range of industry-leading tools for designers and creatives. Still, the $20 billion (of cash and stock) price tag is jarring for a software company going for around 50x ARR (annual recurring revenue). Though the deal did not come cheap, I think Figma makes Adobe’s already impressive arsenal much better.

In the creative space, Adobe’s portfolio is virtually unmatched. Despite the width of the company’s moat (which has been made even wider with Figma aboard), questions linger as to what the firm’s intentions are with such an aggressive M&A move.

Undoubtedly, building a competing product probably would have been viewed more favorably by the value-conscious. Though there are sizeable synergies to be had by gaining access to the plethora of Figma users, the lofty price tag Adobe paid may limit any value creation for shareholders.

Further, as the tech sell-off intensifies, there’s a significant risk that Adobe’s Figma deal could be viewed even less favorably.

With so much pessimism baked into Adobe shares, I’m still inclined to take on a bullish stance on shares of ADBE. Sure, there’s a real risk Adobe overpaid for Figma. However, shares have contracted hugely over the past year. At a modest 28.2x trailing earnings, Adobe is close to the cheapest it’s been outside of a crisis.

Arguably, Adobe’s new multiple is more than reasonable and could act as a new line in the sand as the rest of the tech industry continues to sag in the face of a rate-induced economic downturn.

Figma Deal Shines a Light on Disruptive Potential of Rivals

Figma is a red-hot design platform that virtually came from out of nowhere. Indeed, the intuitive interface and advanced feature set have made it a go-to pick within the industry. Although Adobe has sky-high barriers to entry surrounding its design tools, there’s a real risk that another firm could rise from the startup scene with hopes of challenging the applications within Adobe’s creative cloud.

Indeed, the Photoshop and Illustrator platforms have stood the test of time. However, Adobe must stay on the cutting edge of innovation (think AI-leveraging features) to stay ahead in the new era of digital creativity. Further, the rise of the metaverse could give rise to a slew of rivals, all hungry to help build the future’s digital infrastructure.

Adobe has done a great job of staying on its toes to keep any rivals at bay. Acquiring competitors with cash and stock is always a decent backup plan. As a growing $133 billion company, though, there’s always a chance that M&A moves could be blocked.

The creative cloud is still firing on all cylinders. If anything, a recession may be less detrimental than the bears think, given how necessary Adobe’s platforms are to creative professionals.

What is the Target Price for Adobe Stock?

Turning to Wall Street, ADBE stock comes in as a Moderate Buy. Out of 26 analyst ratings, there are 12 Buys and 14 Hold recommendations.

The average Adobe stock price target is $374.87, implying upside potential of 34.7%. Analyst price targets range from a low of $310.00 per share to a high of $540.00 per share.

Conclusion: Adobe’s Recent Drop Presents an Opportunity

Adobe remains the gold standard in the creative space. Though the Figma deal is hated by investors and various analysts, I do think the discount on shares is too good to pass up for those who’ve been eyeing the name.

With Figma, Adobe has a profoundly strong moat in the creative arena. Adobe also has the means to grow outside its traditional circle of competence with its marketing business. Add a further expansion of collaboration tools and the metaverse into the equation, and Adobe seems like the same attractive company it was just a year ago at all-time highs.

The Figma deal complicates the valuation process, but investors should give management the benefit of the doubt. At today’s depressed multiples, there seems to be quite a bit of gain to be had by giving Adobe’s managers the benefit of the doubt.

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