What happened
Shares of Adobe (ADBE 1.29%) were down almost 17% as of 2:06 p.m. ET on Thursday after the software provider announced revenue results for the fiscal third quarter that came in shy of investor expectations. It also announced a merger agreement to acquire Figma, a leading online design platform for $20 billion in a cash and stock deal. The acquisition is expected to close in 2023.
Figma is a large transaction even for Adobe, and large deals are usually going to draw skepticism on Wall Street. But what is probably concerning investors the most is the price Adobe is paying.
So what
For the quarter, Adobe reported revenue of $4.43 billion, which came in shy of estimates expecting $4.44 billion.
After reporting another quarter of decelerating top-line growth, where revenue grew 13% year over year in the fiscal third quarter compared to 22% in the year-ago quarter, the company is paying 50 times expected annualized recurring revenue to acquire Figma.
Earlier in the week, Adobe had received two downgrades from analysts, so there was already increasing negative sentiment around the stock. The downgrade by BMO analyst Keith Bachman was concerning. Bachman believes younger users of Adobe's Creative Cloud software could switch to competitors' products, based on results of a survey by BMO.
Now what
On the fiscal third-quarter earnings call, CFO Daniel Durn noted that the acquisition is "primarily about creating new markets, expanding adjacent opportunities, and accelerating growth," which lends to the notion that Adobe might be feeling some difficulty in maintaining strong growth with its core products.
Management is guiding for year-over-year revenue growth of 10% in the next quarter. An expensive transaction and lower growth expectations may not support the stock's current price-to-earnings valuation of 30 times earnings.
