Is Figma a Buy After Tripling on Its IPO?

Source Motley_fool

Key Points

  • Figma seemed likely to pop on its debut after it priced its IPO for less than Adobe had offered it three years ago.

  • The company's financials look great, including strong revenue growth and double-digit GAAP operating margins.

  • Following the opening-day surge, Figma's price-to-sales ratio appeared to approach 70.

  • 10 stocks we like better than Figma ›

Figma (NYSE: FIG) stock soared on its opening day on Thursday. After pricing its initial public offering (IPO) at $33, the stock opened at $85 around 2:00 p.m. ET, 158% higher than the listing price, and then continued to climb from there.

The surge came as little surprise. Figma went public with the stock market at all-time highs, and with risk-on tech stocks back in favor, stocks like Nvidia have soared as tariff fears have cooled. Figma also has just about everything investors could want from an IPO, which also seemed to set the stock up to skyrocket in its debut.

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A person looking at a computer with the screen reflected in their glasses.

Image source: Getty Images.

A model start-up

IPOs are inherently risky, but there are a number of features that investors look for to persuade them that it's worth taking the risk. Those include strong revenue growth, profitability, a large addressable market, and scalability of the underlying product or service.

Figma is the rare IPO that has all those qualities, and even better, it has a stamp of approval from the biggest company in its industry. Adobe (NASDAQ: ADBE), of course, tried to buy the company for $20 billion back in 2022, but regulators blocked the deal.

That event may be the biggest endorsement for Figma's IPO, as not only did the leader in design software want to acquire it, but it was also willing to pay a steep premium of $20 billion at the time. Additionally, the combination of the two companies was so feared by regulators that they blocked the deal on account of it having a negative impact on competition in the design software industry.

You can't ask for an IPO to prove itself much more than that, and the fact that Figma's IPO price valued the company for less than what Adobe offered nearly three years ago seemed like a gift to investors able to get their hands on the offering.

Figma by the numbers

It's not just the Adobe deal that gives Figma street cred. Its quarterly numbers are rock-solid.

Over its last four quarters, revenue has grown 46% to $821 million. Even better, the company is already generating wide operating margins on a generally accepted accounting principles (GAAP) basis at 17%. There are plenty of software companies that have been public for years that remain unprofitable, as software investors tend to reward growth over profitability.

Finally, it has a 91% gross margin, showing its core product is highly cost-efficient. That high gross margin makes it easier for the overall business to turn a profit, giving the company more money to spend on product development, sales, and overhead.

The operating margin of 17% also indicates that Figma's product and competitive position are strong enough that it doesn't need an outsize sales force to sell the product, a good sign for the long-term health of the business. Already, 78% of the Forbes 2000 uses Figma, showing big business has embraced the product. However, there is plenty of room for it to ramp up spending, as Figma believes it has a total addressable market (TAM) of $33 billion. That TAM is likely to grow.

Is Figma a buy?

IPOs are risky in part because it generally takes time for a stock to reach its equilibrium price, and investors may have to see a few more quarters of earnings reports before the post-IPO volatility runs its course.

As a business, Figma appears to have a bright future ahead of it, but after tripling on its IPO day, the stock now has a market cap of roughly $60 billion, giving it a price-to-sales ratio (P/S) of around 70. That's a sky-high valuation for even the brightest of IPOs.

At that price, I'm more inclined to wait on the sidelines for now to see whether some of the IPO euphoria fades. I'd prefer to see the P/S ratio fall below 50, which is still pricey, before considering it a buy. That may not happen, but its current valuation seems hard to sustain, especially considering the much larger Adobe has a market cap of only $150 billion.

Investors shouldn't ignore valuation, but there's a lot to admire about Figma. It deserves a healthy premium from the market.

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Jeremy Bowman has positions in Nvidia. The Motley Fool has positions in and recommends Adobe and Nvidia. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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