It wasn't long ago that Figma (FIG +4.34%) was a high-flying new stock that investors craved. After its initial public offering (IPO) was priced at $33 on July 31, shares opened at $85 and soared more than 250% on the first day of trading.
Shares have crashed 55% from the post-IPO high, though, including a drop of 26% this week as of 10:39 ET Friday morning, according to data provided by S&P Global Market Intelligence. Figma reported its first quarterly results as a public company this week. That drove much, but not all, of this week's carnage.
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Stock valuations matter
Figma reported solid quarterly results. Revenue at the designer of cloud-based work collaboration tools jumped 41% year over year. The company was also profitable with positive cash flow. But its outlook for third-quarter revenue implied year-over-year growth would slow to 33%.
That's still strong growth, but the recent euphoria for the stock already has that priced in. Figma stock is trading at about 185 times earnings estimates for this year, even after this week's plunge. It also trades at a price-to-sales (P/S) ratio of more than 25 based on this year's revenue estimate. That's too high for a software stock.
NYSE: FIG
Key Data Points
In some cases, overvaluation can last months or even years from investor faith in the future promise of a company. Tesla, for example, is a trillion-dollar company that still trades at a forward price-to-earnings (P/E) ratio of about 200. That's because investors see huge potential in its robotaxi and humanoid robot products. If huge sales increases from those products don't materialize, Tesla stock will also likely crash at some point.
Figma is a different animal. Its design software offerings are growing, but there are concerns that artificial intelligence (AI) could overtake the need for some software products. Investors interested in owning Figma might want to wait for a more reasonable valuation.
