- Adobe’s stock crashed after the company announced its $20 billion acquisition of growing creative software rival Figma.
- Adobe announced record revenue for the third quarter as the company continued to profit from its subscription-based business model.
- The price of Adobe stock continues to fall as Wall Street is not heavily influenced by the price on the acquisition.
you have chances No In the last decade Adobe opened a file on your computer without seeing the name. They are huge tech company that specializes in the creative software space. It is estimated that over 90% of the world’s creative professionals use Photoshop for business. The company is best known for Photoshop and PDF file formats, but Adobe has a lot more to offer for creatives and those who manage them and sell creative services. We’re going to look at how Adobe makes money, and what’s behind Adobe stock’s recent downward movement.
After recently releasing its earnings report for the third quarter of 2022 on September 15, Adobe reported net income of $1.14 billion for the period on revenue of $4.43 billion. However, the announcement of the Figma acquisition caused the stock to tumble as Wall Street is not happy with the move. What’s behind this Figma purchase, and how does it affect Adobe’s future?
How does Adobe make money?
It’s estimated that over 400 billion PDFs were viewed with Adobe products last year, and we can’t ignore how popular the company has become. Annual revenue for 2021 was $15.785 billion, an increase of 22.67% over 2020. For the third quarter of 2022, Adobe reported a record-setting revenue figure of $4.43 billion, representing 13% year-over-year growth.
There are three revenue streams when you look at Adobe’s earnings report:
- contribution. The segment brought in $4.128 billion for the previous quarter, representing 93% of the company’s revenue.
- the product. The sector invested $126 million in the most recent quarter. The product doesn’t bring in meaningful revenue because Adobe now operates on a subscription model instead of selling its software. However, Adobe still makes nine figures licensing apps.
- Services and others. It brought in $179 million last quarter. This includes funding received from related services, training and certain small business segments.
Adobe divides revenue into two operating segments: digital media and digital experiences. Digital media revenue for the quarter was $3.23 billion, and digital experience revenue reached $1.12 billion.
Digital media includes the popular Creative Cloud and Document Cloud services. The document cloud includes Adobe Acrobat and Adobe Sign services. Creative Cloud includes popular applications like Photoshop, Illustrator, and Premiere Pro, to name a few.
The Digital Experience segment includes Experience Cloud, which is a tool that companies use for marketing commerce purposes. Regular customers usually do not know this product as it is designed for enterprise use. The Experience Cloud platform uses data, software and analytics tools that allow businesses to track the buyer’s journey. Products here include:
- Adobe Experience Manager for Content and Commerce.
- Adobe Experience Platform for Data Insights.
- Adobe Workfront for Marketing Workflow.
The company also provides email and other analytics options under this segment.
A quick glance through the Adobe website shows all the products offered under Adobe Creative Cloud, Adobe Document Cloud and Adobe Experience Cloud.
What’s up with Adobe Stock?
Adobe has suffered major losses in the stock market over the past two weeks, despite announcing record-breaking revenue for the quarter. Confusion among analysts has left the brand in the mud, and their stock price has fallen accordingly.
Wall Street doesn’t like the move as the $20 billion figure is roughly 50 times Figma’s estimated revenue (annual recurring revenue) for the year. As a result of this announcement, the stock has declined significantly.
Adobe announced its acquisition of Figma on September 15, and Adobe’s stock was down 24% by the following day as the announcement came as a disappointment. The initial news caused Adobe stock to crash almost 17% immediately, which wiped out nearly $29 billion of its market cap. It was the worst single-day drop for Adobe since September of 2010. This one move wiped out $9 billion more from the market cap than Figma’s actual purchase price.
Many analysts have been coming forward with a reduction in price targets for Adobe since the acquisition was announced, leading the stock to decline. We’re going to go a little deeper into Adobe’s reasoning behind this move.
The stock started crawling on the last two days, September 27 and 28.
Adobe will acquire Figma
During the last earnings report on September 15, Adobe dropped the news that they were buying Figma for $20 billion, plus an additional $2 billion for management retention while CEO. The hefty $20 billion would be paid for with cash, stocks and possibly a term loan.
The proposed acquisition should take place in 2023, pending regulatory approval. Figma was founded in 2012 and sells a design application tool that is used to create websites, apps and logos.
Several analysts immediately pointed out that the price does not make sense for Figma. Figma was valued at $10 billion in June 2021, so that’s a huge jump in valuation. The general consensus was that this was a defensive move; Adobe was concerned about gaining market share ahead of a competitor, so they had to negotiate a weak position. Many felt that Adobe was losing too much momentum for Figma, so the move to desperately buy them rather than attempt to compete with them was at least strategic, if questionable.
This leaves many investors speculating whether other competitors like Canva or Sketch can catch up to Adobe as the popularity of cloud-based graphic design tools grows around the world.
Other analysts said Adobe let a competitor grow so quickly that they had no choice but to pay a premium to buy them, an immediate red flag that research and development is out of touch with customers and the broader market. .
As Adobe transitioned to cloud-based software, it was clear that Figma was gaining market share with its collaborative design tools. Many users felt that Figma’s cloud-based design software was not only cheaper, but also easier to use and more collaborative than Adobe’s products. Figma’s software is currently used by large companies such as Airbnb, Google and Netflix to design their websites.
Adobe, on the other hand, is removing a bigger competitor with this move, and they also buy a fast-growing business. The company is keeping it on the cutting edge by buying this successful company, rather than investing the time and resources to spin something internally. Adding Figma to the company will increase revenue.
Figma’s revenue is growing 100% annually, and gross margin is 90%. These two key figures may be enough to justify the acquisition because Adobe already has a strong global sales force that could benefit from this additional revenue stream.
How can you invest in this sector?
The digital design field has exploded, and it will continue to grow for some time, especially on top of a substrate of cloud software. Many users turned to Canva because the tool allowed cloud-based collaboration for creatives, and was much easier to use than more advanced applications like Photoshop and Illustrator. As cloud applications become more popular and easier to scale, the competitive landscape will remain strong.
With Adobe’s stock plummeting on news of the acquisition, some analysts think it would be the right time to buy, while other analysts continue to downgrade Adobe stock. It’s hard to predict exactly how the acquisition will go, but there’s certainly potential for Adobe to significantly increase its revenue with this additional synergy, on top of already impressive growth as of late.
We will continue to monitor this tech giant as they follow through on this move. It is too early to decide what the buying will mean for revenue and growth going forward.
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