Everything got off to a good start at the end of July when the stock was first listed, with the share price soaring. However, the euphoria did not last long, as it quickly fell back below its IPO level.
But the real inaugural test for the market came yesterday at the end of trading with the release of Q3 figures. Overall, they were in line with expectations, but it was forecasts that disappointed. Annual growth is expected to be 37%, while analysts had hoped for over 40%.
On the surface, a 3-point difference may seem too small to cause such a correction given growth of close to 40%. However, the stock is already very expensive, trading at over 200x expected earnings. At this valuation level, the market anticipates considerable future earnings potential and is rarely satisfied with "in line with expectations." Forecasts must be exceeded, otherwise the multiples become unsustainable.
However, this disappointment in no way alters the stock's intrinsic quality. First, because Figma is growing in a market where competition is currently weak. Figma's field is UX/UI design, which is used to design the functionality and appearance of a website or application: where to place a button, how to organize navigation, and testing whether a user journey is simple and enjoyable. In contrast, players such as Adobe and Canva are involved in graphic design with the aim of producing visuals (logos, posters, enhanced photos, social media posts) with an aesthetic objective. Adobe had certainly developed a direct competitor with Adobe XD, but the group eventually abandoned it after its failed attempt to acquire Figma. Furthermore, for a potential new competitor, the barriers to entry are high, as developing software that is as powerful, fluid, collaborative, and already widely adopted requires enormous technical investment.
Furthermore, the customer base is considerable, with 13 million monthly active users, 78% of Forbes 2000 companies, but only 450,000 paying members. This leaves huge potential for conversion. Loyalty is also high, with a retention rate well above 100%. In addition, the company has demonstrated its ability to impose price increases without damaging demand, as it did last March. Finally, more than 80% of customers use at least two of the products, whether for designing web and mobile applications, tools dedicated to software development, the creative process, or collaboration.
The company's other major asset is artificial intelligence. The rapid rise of new applications and the modernization of old ones make them essential drivers for its software. AI now plays a central role in the design process, from idea generation to application deployment.
Figma remains the leader in a fast-growing niche market with limited competition. Margins are significantly higher than its peers, and cash flow from operations is currently being used to invest heavily in preparation for the coming years. The stock is certainly undergoing a sharp correction, but this decline is helping to bring down a valuation that had reached unsustainable levels.
