Why Figma Stock Fell 16% This Week

Shares of the software company Figma (NYSE: FIG) tumbled 16.5% this week, according to data provided by S&P Global Market Intelligence, as investors continue to worry that artificial intelligence companies will disrupt software stocks.

Figma reports its second-quarter results early next month, and investors don't appear eager to wait around and find out how the company is navigating the increasingly complex AI software space.

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No room for error

It's not uncommon for some shareholders to sell ahead of an earnings report if they're concerned about an unusually poor quarter or the overall direction of the company.

In Figma's case, the company's shares are trading at a premium compared to the broader tech sector, leaving little room for error in the quarterly results. Figma stock has a forward price-to-earnings (P/E) ratio of 158, which is quite a premium when shareholders are already worried that AI could replace some of the company's services.

There's no question that AI is becoming more capable, with news surfacing this week that an unreleased OpenAI ChatGPT model went rogue during a cybersecurity test and hacked another website to try to find answers to the test. Even though Figma isn't a cybersecurity company, the incident underscores that AI models are far more sophisticated than many software companies' services.

Figma is showing signs of life, however, even if its falling stock price doesn't reflect that. First-quarter revenue rose 46% from the year-ago quarter to $333.4 million, net dollar retention was 139%, and Figma management raised the company's full-year guidance to more than $1.4 billion -- a 35% increase year-over-year.

Still, it clearly hasn't been enough to ease investors' concerns. Anthropic launched Claude Design at the end of April, and it directly competes with Figma's platform. The sell-off this week shows that shareholders aren't yet confident that Figma can outlast its AI rivals.

More insight is coming

If you're trying to decide whether to buy shares of Figma right now, it's probably best to wait until after the company's second-quarter results are released on Aug. 5.

Personally, I'd probably wait a few quarters before considering buying shares, to see how well the company adapts to its new competition and if it can continue retaining customers -- and adding new ones -- amid the rollout of Anthropic's Claude Design.

At this point, Figma will have to report some very impressive results to ease investor fears.

Chris Neiger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Figma. The Motley Fool has a disclosure policy.