Numerous regulatory objections were piling up for Adobe's (ADBE 0.87%) blockbuster $20 billion acquisition of fast-growing start-up Figma. And it's now official. With "no clear path" to satisfying regulatory concerns in Europe and the U.K., Adobe is walking away from the Figma tie-up.
To be clear, Adobe is going to be absolutely fine. It's still in pole position in all things creative software. But after an epic year of AI-fueled growth comes to a close, Adobe is facing tougher growth comparisons without the inclusion of its hoped-for Figma prize. Is the stock a buy for 2024 anyway?
No Figma means Adobe is $1 billion poorer
In September 2022, Adobe said it would acquire Figma for $20 billion, half in new stock and half in cash (much of that cash funded with new debt). It was a sky-high valuation for Figma, which was on track to reach $400 million in annualized sales at the end of 2022, double that of 2021. But with lots of young creators flocking to Figma's collaborative design software, it seemed clear Adobe wanted to purchase Figma to stave off a potential future threat to its creative software empire.
I wasn't particularly enthralled with the proposed purchase when the deal was announced, but I decided to hold on to my Adobe stock at that time. A few months later early in 2023, after mulling over the implications of the merger, I decided to sell Adobe. I'm not sorry. I reallocated some of the proceeds into Salesforce (CRM 0.42%), which, just my luck, has outperformed Adobe stock in 2023.
Data by YCharts.
At any rate, though Adobe will be just fine without Figma, there could be some lumps ahead. As part of the original deal, Adobe will have to pay a $1 billion acquisition termination fee to Figma. Adobe is good for the cash, but it isn't chump change, either. Adobe had $7.8 billion in cash and short-term investments on hand at the beginning of December 2023, offset by total debt of $3.6 billion.
Adobe is a great company, but is it a buy now?
Adobe is coming off a solid 2023, one in which it outperformed thanks in no small part to its quick rollout of new generative AI tools. Nevertheless, there were headwinds as many of its customers pared back new spending amid uncertain economic times. Full-year revenue gained 10% to $19.4 billion, and earnings per share (EPS) -- both on a GAAP and adjusted basis -- rose 17%.
But slower growth (relative to years past when it grew revenue at a high-teens to low 20s percentage rate) is still clearly hitting Adobe right now. For fiscal 2024, management said revenue is expected to increase to as much as $21.5 billion, implying year-over-year sales growth shy of 11%. GAAP and adjusted EPS are expected to rise as much as 17% and 12%, respectively.
To be clear, these are solid numbers, boosted by Adobe's high rate of profitability which it uses to repurchase ample amounts of stock. But the valuation is also quite high after all that 2023 AI hype. Shares trade for 42 times the high end of expected 2024 EPS, or 33 times the expected high end of 2024 adjusted EPS.
If you own Adobe stock right now, there's no reason to fret. Though the Figma transaction has fallen through, Adobe remains one of the most powerful software companies around. It no doubt has some other tricks up its sleeve to continue its steady and profitable growth. But for those looking at making a buy in 2024, there could be cloud and AI stocks with a better valuation to give a closer look right now. I, for one, still like Salesforce's momentum headed into the new year.
