Figma Stock: Is It Safer Than It Looks?

Key Points

• Figma's strong growth captivated investors early on, but question marks have pushed them away of late.

• The design software company is growing at a healthy pace this year -- over 30%.

• Adobe bid $20 billion for Figma three years ago, and its market cap today is just under $27 billion.

• 10 stocks we like better than Figma ›

Shares of Figma (NYSE: FIG) saw a hot start out of the gate following their initial public offering in July, but they've recently been in a free fall as investors worry about the company's high valuation. Last week, the stock closed at less than $55 per share, far lower than the $85 it first opened at on July 31.

The company, which helps users and businesses collaborate on design, recently reported its first earnings numbers since going public. Unfortunately, that didn't do much to calm fears and concerns about the stock.

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But with so much bearishness around the stock of late, is it possible that Figma's a much better buy than it seems?

Image source: Getty Images.

What Figma's recent earnings numbers say

On Sept. 3, Figma posted its second-quarter earnings. The company showed some excellent growth, with sales totaling $249.6 million for the period ended June 30. That was an increase of 41% year over year. Its net dollar retention rate (for customers whose annual recurring revenue is over $10,000) was 129%, which means that its core customers are spending significantly more than they were a year ago.

These are all excellent growth signs for the business and show that customers are seeing value in Figma's products and services. In terms of cash flow, which can be more important than just profitability for a business in its early growth stages, things also look solid for Figma. Operating cash flow was a positive $62.5 million, which was a sharp improvement from the negative $178.2 million it burned through a year ago.

All in all, it was a solid quarter for the company, with the business still expecting a strong growth rate of around 33% for the third quarter.

Just how high is Figma's valuation?

Figma's market cap is right around $27 billion today. Before getting into earnings or revenue multiples, consider that just three years ago, software giant Adobe wanted to buy Figma for $20 billion as it saw a lot of potential growth for its collaboration tools and software. Figma is worth approximately 35% more than that right now, which is by no means outlandish given how hot the market has been in recent years. The S&P 500 has risen by 63% over that timeframe.

Arguably, the business may have already been inflated at such a valuation. But if you believe that Adobe was valuing Figma at a reasonable price in 2022, it may not necessarily be all that expensive today.

Currently, Figma's stock trades at 30 times its trailing revenue. In comparison, Adobe is at a price-to-sales (P/S) multiple of less than 7. Adobe is, of course, much larger in size and growing at a slower rate, and thus will command a lower multiple from growth investors. Meanwhile, Figma's forward price-to-earnings (P/E) multiple, which considers analyst expectations of how it will do in the coming year, is a whopping 286. But when a company's earnings are still limited, the P/E multiple can look incredibly high.

Is Figma's stock worth buying right now?

Due to Figma's falling share price, I believe there could be a good case to make for buying the tech stock right now. However, there's still some risk around it because the company's earnings would need to improve for it to be a formidable investment option. My biggest concern is how the company's design and photo editing tools will stack up against those from other services, especially with artificial intelligence enabling companies to offer more advanced editing capabilities these days.

But with significantly improved cash flow, and impressive growth in excess of 30%, Figma is moving in the right direction, and consumers and businesses appear to love its products. I'd prefer to hold off and see if the company can make more progress on the bottom line, which was pretty well at breakeven this past quarter, before investing in it.

However, if you're a believer in its products and are OK with the risks I've noted above, Figma could turn out to be a good investment. Its valuation has come down to a point where it doesn't look extremely overvalued anymore. If it can continue to deliver strong growth numbers and also improve upon its bottom line, the P/E multiple will come down, and the stock could have a lot of room to rise higher.

Should you invest $1,000 in Figma right now?

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe. The Motley Fool has a disclosure policy.