What happened
Shares of Adobe (ADBE -0.77%) plunged by 26.3% in September, according to data provided by S&P Global Market Intelligence.
With this tumble, the share price of the software company has been cut in half year to date.
Image source: Getty Images.
So what
Adobe turned in an encouraging report card with its fiscal 2022 third-quarter earnings, for the period ended Sept. 2. Revenue hit a record-high of $4.43 billion, up 13% year over year from $3.9 billion a year ago. Operating income inched up by 3% year over year to $1.48 billion due to higher sales, marketing, and research expenses, but net income slipped by 6.3% year over year because of higher tax expenses.
The market's attention, however, was focused on a major acquisition that Adobe announced along with its financial results. The company agreed to acquire Figma, a collaborative design platform, for a princely sum of $20 billion with a mix of cash and stock. The rationale behind the purchase was to integrate Figma's product portfolio with Adobe's to deliver better experiences and products to their customers. With a gross margin of around 90% and a total addressable market of close to $16.5 billion by 2025, Adobe is confident of driving growth in its top and bottom lines with this acquisition.
Investors, however, were less than convinced. Figma is expected to add $400 million in annual recurring revenue for Adobe by the end of fiscal 2022, which implied that the software giant had paid a pricey 50 times revenue. With risk appetites having fallen amid rising interest rates and four-decade-high inflation, the acquisition came across as being a tad too expensive to stomach.
Now what
Adobe provided decent guidance for its fourth quarter, projecting a 10% year-over-year rise in revenue to $4.5 billion. However, earnings per share were expected to come in 5% lower compared to the same period last year, weighed down by foreign exchange headwinds and the weaker macroeconomic environment.
Investors will also be waiting to see how the company integrates Figma, and whether the announced synergies can take place to lift Adobe's top and bottom lines. At a valuation of close to 30 times its annualized earnings, the stock still seems expensive, but is less so compared to a year ago.
