Figma Stock Is Tumbling After Its IPO. Should Investors Buy the Dip?

Key Points

• The company's online design software has become hugely popular.

• However, Figma has now captured a large chunk of its target audience.

• The stock trades at a premium, so investors might do well to be patient.

• 10 stocks we like better than Figma ›

Figma (NYSE: FIG) recently went public via an initial public offering (IPO), and its stock had a massive day one. Originally, shares of the online design software maker sold at $33 per share, which was above the expected listing range. The stock quickly rocketed to more than $120 per share by its second trading day due to massive demand.

Yet, it has been all downhill from there. At the time of writing, Figma's stock is priced around $70 per share, so most people who didn't buy shares at the initial $33 per share offering price (mainly institutional investors) are sitting on a hefty loss.

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With the recent weakness, is Figma stock a buying opportunity for investors? Or is there something else going on here?

Image source: Getty Images.

Figma has some impressive financials

Figma is a name that some investors may remember. Adobe (NASDAQ: ADBE) tried to purchase it for $20 billion in 2022, but the deal fell apart in 2023 after regulators expressed concerns. Figma is a direct competitor to Adobe in one specific area, which caused the regulatory concerns in the first place.

Figma allows for real-time collaboration in creating user interfaces (UI), such as for an app or a website. This real-time collaboration is a big deal, as it allows multiple people to work simultaneously, rather than having to pass around a file for continuous work. It also shortens the development time considerably when more than one person can work on the UI, saving on costs.

Figma has some impressive finances, generating $821 million in revenue over the past 12 months and growing at a 46% pace. It also boasts an impressive 91% gross margin, which will give it massive potential to produce outstanding profits in the future. However, there's one item that concerns me with Figma, and it will need to come up with a solution to make itself an attractive investment.

Investors should be patient with Figma stock

One fact that Figma boasts about in its S-1 registration documents is that 78% of the Forbes 2000 use Figma. While that's impressive, investors might want to look at that metric the opposite way. Only 22% of large companies remain to sell their products to, which could create a massive growth hurdle in the future.

So instead of selling its base capabilities, Figma will need to develop new products and upsell to existing customers. Many companies have succeeded using this business model, so it's not the end of the world, but it is a challenge that investors must be aware of.

Additionally, with the massive pop in Figma's stock price, it's not cheap. It trades around 35 times sales, which is an expensive price tag for a software stock, despite Figma's strong growth. At that price tag, I think investors are OK sitting on the sidelines with Figma stock for now. It has a few complementary products that have earned a ton of business rapidly, but I want to see what's next with Figma.

Management will need to lay out their growth case over the next few conference calls to convince me that shares are worth buying at this price tag. We'll hear from management for the first time on Sept. 3. There are a lot of outstanding questions with Figma, and the stock is currently being driven by short-term trading activity, not long-term investing.

This is an excellent stock to learn more about over the next few months, and it could be worth investing in once it has stabilized.

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Keithen Drury has positions in Adobe. The Motley Fool has positions in and recommends Adobe. The Motley Fool has a disclosure policy.