David Tran
Figma founders pitch for funding focused on Adobe (NASDAQ:ADBE) from the outset way back in 2012 saying “Training on photoshop is a long and arduous process”. He described his vision as a set of simple creative tools that are browser-based. 10 years later that same target ADBE bought Figma for $20B. Let’s sidestep the details in how much ADBE overpaid, purely by the numbers, they did overpay. I think that ADBE revalued at under $300 when it was once $800 a share, it is on its way, if not already fully arrived at a discount for the outlay. Shantanu Narayan has built ADBE through some very smart acquisitions. I think he reasoned that he really had no choice but to buy it. I also believe he did something very brave he bought a competing platform that will take share from his current product line. Figma brings a digital-first collaborative, and creative tool that is being embraced at a grass-roots level even in enterprises that have already standardized on ADBE products. Younger developers that grew up as digital natives want a unified product platform that boosts group work. This capability allowed Figma adoption to explode during the pandemic. The product is applied in areas that are not wholly about creating images. It’s used to develop video games, maps, and presentations but is most intriguing by software designers (aka product managers), at sophisticated software technology companies like Google (GOOG), Airbnb (ABNB), and most interestingly Microsoft (MSFT). Microsoft had a previous strong commercial relationship with ADBE. Yet the younger set insisted on using Figma instead. They forced head-to-head comparisons and showed how Figma was superior. It had gotten to the point that projects at Microsoft had difficulty recruiting internally for design people as they insisted on eschewing the ADBE products.
As quoted in “The information” it is now a 3-way race between Figma, ADBE’s XD product, and another design startup Invision, FIGMA is the runaway winner. Figma already has more users among enterprises that have 10,000 or more workers, than XD or Invision, as well as more usage at smaller companies. The fact that large enterprises are engaging with Figma where there are already a variety of available products and a desire to standardize on one tool to lower costs is impressive. The piece that intrigues me the most is the notion of software designers collaborating to develop applications. This brings Figma into a hugely rich market though there are sophisticated competitors there, the first that comes to mind is Atlassian (TEAM). They built a very good business in “DevOps”. This is the activity that governs application development in a way that boosts productivity in part through collaboration. I am not saying that justifies the price of $20B, but TEAM’s market cap is over $61B. Yes, Atlassian products do more than network software designers, however, since TEAM has been widening its market niche there is overlap. In fact, I would say that Figma also impinges on the Low-Code/No Code niche as well. If Low-Code is about gathering the specifications from non-developers and generating code, a collaborative tool that concentrates on the presentation is likely the place the activity would start. The idea of building business applications around collaboration and networking has been permeating a lot of areas in enterprise software. Thoma Bravo just acquired Anaplan, which integrated business planning with networking and collaboration. There is also Smartsheet for collaboration and work management. It is used to assign tasks, track project progress, manage calendars, share documents, and manage other work, using a tabular user interface. What I am getting at is that Figma is part of a larger movement toward collaboration because it maximizes productivity and speeds decision-making and approvals. Gone are the days of separate silos where the designer works on their piece without input until they “show” their work. Or if they tried to be collaborative it was a much more difficult task. Critics say this acquisition is defensive and could cannibalize their own products’ revenue. Chief Financial Officer Daniel Durn disagrees, saying Figma will spark a new era of growth. “This is about positioning the company to define new categories and drive growth for decades to come”. As I noted earlier ADBE is eyeing green new fields of opportunity in software design and development.
Was it worth it? After all 50 times revenue is unheard of
I bet anyone stopping to read this argument has already heard all the condemnations. Some have questioned Shantanu Narayan’s judgment, in saddling ADBE with all this debt. ADBE has “only” $6B on the books so they’ll have to go into debt for the $10B cash, on top of the dilution of the stock for the other $10B. Acquiring Figma has to be looked upon as buying time. ADBE already tried to build in the collaborative capability of Figma and failed. So does ADBE try again? Even if successful, it has to be built, tested, marketed, and sold. How many billions does that take? Meanwhile, how many Figmas rise up and chip away at ADBE’s market dominance? How many more $billions of market cap is subtracted from ADBE while it attempts to build its own collaborative creative platform? Also, nothing prevents ADBE from integrating some of its current products into this platform. ADBE maintains that Figma should be accretive in 3 years. 3 years can be an eternity in tech, to the good and the bad. Look at what has happened to Intel in the last 3 years. In sum, I would say yeah ADBE paid a LOT for Figma but it really can’t afford to.
My trades
It shouldn’t surprise you to know that I bought a bit of ADBE Thursday at $326. I thought I got a huge bargain. That is until I blinked and the stock continued to plummet. I did NOT chase it down, which is a rookie move. Going into September I reduced my position in ADBE to a placeholder position. So I was already prepared to pick up more shares. By the end of Friday, ADBE closed under $300, yet less than a year ago it was trading at $700. I will look to add a bit more ADBE this coming week. My way is to build such positions gradually as part of the Cash Management Discipline. Also with the volatility, we are going through I don’t need to hurry.
On Friday I closed out nearly all of my inverse 3 X ETFs, Our DMR Community uses them as means of hedging. If you look at the small print of their description, they all caution you to use it for a day trade. I therefore really try to keep hedges on for no more than 5 to 7 trading days at a time. Also, one never knows what news can develop over the weekend. So with the steep sell-off, the production of so much alpha made it easy to let go of them. This week I will start off largely unhedged, with a nice chunk of cash and open to adding to positions in my usual gradual way. Just to be clear inverse ETFs go in the opposite direction of where a sector or index is going. A 3 X inverse ETF will multiply the move by 3. Also, I am sure you noticed that I did not list the symbols. I want to urge you to research inverse ETFs, it’s not for everyone. Before you use them as hedges, you ought to use cash as a hedge. This is the essence of the Cash Management Discipline.
WTI retreated from the 90s, and now I believe it is moving back up. I intend on building back my old oil stocks again. Please note, that I have a long-term investment in a variety of Oil names. I tend to write about my “Slow Money” trades position Intend to hold for 3 to 36 months. In this light, I am using Oil and NatGas names as a mild hedge to the growth names that I favor. I put money back into Equinor (EQNR), Coterra (CTRA), and Ovintiv (OVV), I am looking to add back Exxon Mobil (XOM), and Apache (APA).
As far as growth names Alphabet (GOOGL) finally came back down to where I first bought it around the time of the split. I even saw that it broke 101 on Friday. To me, that might mean that GOOGL could break below 100. I would love to scoop up a few shares at that level. I feel the same about NIKE (NKE) which is getting very close to its 52-week low having fallen below 104. Stocks seem to regard 100 like a magnet. If the stock is in the 90s and is moving up there is a good chance that it reaches 100 and rises above. The same for stocks above 100 and falling it seems to reach for 100 and then breaks below. So I added to NKE and am hoping to add shares below 100. My average price for Microsoft is $247, and it closed on Friday at $244, I intend to add shares at that price or lower. Also, Apple (AAPL) which is a name I have stayed away from for nearly a year broke below 149. I would be very interested to rebuild a position starting at the low 140s. My plan is to have a portfolio with the majority of growth names of the highest quality. I am going to be patient and wait for names to come to me.
It might seem strange for me to talk about acquiring stocks going into the teeth of the FOMC meeting. I think we have really gone very rapidly into an oversold condition so I am willing to risk a bit of my precious cash. I am not saying that the selling is over, but right now good stocks are at very attractive prices. I think it is a worthwhile risk to buy a few shares here and there. In the meantime, cash is still as valuable as ever. So when I say I am buying a few shares here and there I really mean a few shares. I hate to make a definitive prediction but don’t be surprised if the market returns to be buoyant. In my previous article, I said that we are near the end of the bear market, which was roundly criticized in a number of comments on that article. Yet, there is a lot of precedent for a bullish market in a midterm election year. Powell will likely raise and .75% and will likely make as hawkish a position as ever. Let’s not forget that at the last rate rise we experienced a buoyant market for a number of days. Beyond that, we’ll have to see, but keep in mind that we are seeing a lot of forward-looking data that is showing a number of areas where prices are coming down. At some point, Powell will have to stop raising, if just to assess the effect on inflation his raises have wrought so far.
When it becomes so easy to short a market, it is time to get cautious on the short side. I wish you all the best of luck this week. If anything, it is going to be very interesting.
Be the first to comment