Why Figma Stock (FIG) Is Plummeting Today, Down More Than 50% Since Its Monster IPO

Key Points

• Figma reported its first earnings post-IPO, delivering 41% revenue growth.

• However, the company missed on earnings and reported a slight decline in customer retention.

• The company's valuation after its IPO is stretched.

• 10 stocks we like better than Figma ›

Shares of Figma (NYSE: FIG) are sinking on Thursday, down 18.3% as of 1:09 p.m. ET. The drop comes as the S&P 500 and the Nasdaq Composite both gained 0.4%.

The design software vendor reported earnings for the first time as a public company, delivering numbers that were largely in line but failed to justify the stock's massive post-IPO run-up.

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Figma stock crashes despite 41% sales growth

The company reported Q2 sales of $249.6 million, up 41% year over year (YOY) but slightly missing Wall Street's target estimate. Figma reported net income of $846,000, well below analyst expectations, with the company citing preferred share distributions as the culprit. Without these, the company says it would have earned $28.2 million.

Figma expects Q3 revenue between $263 million and $265 million, with full-year sales projected at $1.02 billion to $1.03 billion. While these numbers were mostly in line with expectations, they failed to justify the stock's monster run post-IPO.

Perhaps the most concerning figure was Figma's net retention rate -- a critical metric for its business -- which fell 3% from the previous quarter.

Image source: Getty Images

When good isn't good enough

41% revenue growth would be impressive for most companies, but Figma isn't trading like most companies. Analysts at Piper Sandler called the report "largely a non-event," which is exactly the problem. When your stock is trading with Figma's price to sales (P/S) ratio of nearly 40, you need blowout quarters consistently. Merely great quarters won't satisfy investors.

Today's sell-off is a reminder that good companies can be bad investments at the wrong price. I think Figma is a good company, but I would wait for its stock to come back to earth.

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.