Figma (FIG 4.36%) is one of the newest stocks on the market, after making its public debut on July 31. It's a name that investors may be familiar with, as Adobe (NASDAQ: ADBE) attempted to buy it in 2022 for $20 billion. That deal fell through, and Figma eventually went public on its own.
With Figma being a rapidly growing hot tech stock, many investors might be wondering if Figma is their ticket to becoming a millionaire. Most companies go public at a small size, making it an excellent time to buy. But is this the case with Figma?
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Figma's IPO could have been priced better
To say that Figma mispriced its initial public offering (IPO) is an understatement. Figma sold shares at its IPO at $33, but the stock promptly rocketed to about $120 per share by Aug. 1.
This shows that there is a massive demand for IPOs in the current market, and Figma left a lot of money on the table by pricing itself so low. However, the stock has given some of those gains back, as it now trades for about $80. Still, that's an impressive run-up, and it shows that there's a ton of interest in Figma stock.
Figma's software allows design teams to collaborate in real time to design user interfaces. This is an incredibly useful feature, which is why Adobe attempted to buy it a few years ago. Figma is also displaying impressive growth, with its S-1 registration document stating it grew revenue by 46% in its most recent quarter.
That's a solid company, and it shows there is strong demand for its products. But there is also one red flag here. The report claims that 78% of the Forbes 2000 use Figma. While that sounds impressive, it limits upside. There aren't a ton of customers available to capture, so Figma must release new products that clients adopt, or capture smaller businesses. We'll see how this plays out over the next few years, but it's an area to watch out for.
At its current market price of around $80 per share, Figma has a market cap of about $34 billion. That's a large company, and even if you invested $10,000 in the stock, it would require a $3.4 trillion company to turn that sum into $1 million. Since that would place Figma among the largest companies in the world, that statement is a bit far-fetched. But is it still worth buying at today's prices?
Figma has some challenges with its future
Over the past 12 months, Figma has generated $821 million in revenue, which gives it a valuation of 41 times sales. Since most software companies trade at between 10 and 20 times sales, that's an elevated valuation that investors should consider a risk. It also limits upside, as Figma's stock will spend some of its time growing into that valuation rather than letting its results do the talking.
Another risk with Figma's stock is its vulnerability to artificial intelligence (AI). Figma's software allows multiple users to collaborate and build a user interface, but what happens if AI can do it by itself, and it can be checked by one person? This is a real risk to Figma's business model, and investors shouldn't discount the potential for disruption, even though it's a recently public company.
Although Figma may be an OK investment over the long term, it likely doesn't have the chance to make you a millionaire. Additionally, with Figma's expensive stock price, I want to see a few quarters of financial results and understand management's growth plans. Recent IPOs can be a dangerous playing field for long-term investors, and most would be better suited waiting for a year to see what Figma does before hopping in.
