As can be expected with any blockbuster acquisition, there are a lot of varying opinions out there right now on Adobe's (ADBE -1.12%) mammoth $20 billion buyout of privately held competitor Figma. Overall, the market is unhappy. Adobe stock slumped nearly 20% since the deal was announced, equating to a market cap loss of roughly $35 billion in just 4 market days (as of this writing, Adobe is valued at $138 billion). Clearly, investors think something is amiss.

While I plan on holding on to my small position in Adobe, for now, I'm doing so begrudgingly. Adobe has nothing short of an empire built in the fields of digital content creation and management software, but it may have underestimated the ability of tiny upstarts to disrupt it. A $20 billion price tag is proof of this error. 

Adobe may not be the company we thought it was

For many years, investors have praised Adobe for its defensible "moat" -- its big lead in creative software and document management that peers can't crack. I own some Adobe stock because I admire how deeply embedded it is in the creative world and its steady double-digit percentage growth over the course of decades.

But technology is a tricky business. I don't really believe there are many true defensible moats in software and computing technology. Tech is all about continuous improvement, a strategy of playing business offense -- not playing defense. 

Adobe's $20 billion buyout of Figma seems like an admission from Adobe: that it underestimated an upstart peer until it could no longer ignore its ascension. And it's not just the price ($20 billion is one of the largest-ever acquisitions of a privately held software company). Figma will reportedly exit 2022 with over $400 million in annualized recurring subscription revenue. So Adobe is paying some 50 times sales (not bottom-line profit, but top-line sales) for Figma. Additionally, Adobe estimates Figma will have a total addressable market of $16.5 billion -- but not until 2025.

Granted, Figma should inject some growth into Adobe's slowing, aging operation. It's reported that Figma's net dollar retention rate is greater than 150%, meaning that the average customer that spent $1 on last year's contract is spending $1.50 on this year's agreement.

Perhaps time will prove $20 billion isn't so ludicrous if Figma proves to be a massive driver of growth in the coming years. But it will take time to tell. Adobe will pay $10 billion in new stock and $10 billion in cash to Figma. Since Adobe only had $5.76 billion in cash and short-term investments on hand at the start of September, debt will need to be raised.  

If Figma can, who else could eat Adobe's market?

I believe Adobe must have been negotiating from a position of weakness to have paid so much. After all, 50 times sales would have been an eyebrow-raiser in 2021, let alone in the current bear market of 2022. But Figma specializes in collaborative product design, a key component of Adobe's suite aimed at large enterprises. With Figma expanding so fast and getting so large, something must have had Adobe worried for it to agree to such a premium just to turn a small rival into an asset. 

And what other start-ups out there could be next? After all, Adobe shelled out $1.275 billion last October to acquire collaborative video creation software company Frame.io. Canva, for one, is another privately held company doing some pretty cool things on the graphic design side. Canva was valued at as much as $40 billion in 2021 during a private funding round, although more recent reports suggest that valuation might have been cut in half.

Either way, none of this reads "Adobe the highly defensible software giant." A slew of smaller competition might be exposing some cracks in Adobe's foundation -- and getting to be quite large in their own right as they do. This is especially the case as the pandemic turned cloud computing software not just into a "nice to have," but rather into an absolute "need to have." Adobe has made that transition to a cloud-delivered software model, but Figma was obviously winning market share with its collaborative design tools. 

Again, I'm willing to hold for now to see how Adobe does once Figma is in the fold. The company is still growing, albeit at a much slower pace than it was a few years ago, and it's highly profitable. But it might take a few years to know if buying Figma was for sure a good move. In the meantime, I'm leery of the implications of this deal for Adobe.