Figma (FIG -3.45%) stock went public on July 31, and initially, it got off to a hot start. It opened the day at $85 and reached a high of nearly $143 the following day. Things looked promising for early investors.
Then, however, the stock ended up crashing as worries about its valuation and the potential of a bubble began to weigh on growth investors. And its recent earnings numbers may not have helped. Last week, it closed at just over $53, which is a near-40% decline from where it opened on its first day of trading.
Has this tech stock become a bargain buy at its current levels, or could more of a decline be coming for Figma in the weeks and months ahead?
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Why Figma could make for a compelling growth play
Figma has a promising business model that centers around teamwork and collaboration. Rather than paying high prices for fancy design software, companies can opt for Figma's more user-friendly options, which can be more practical when working in a team environment. At a time when users are working to create compelling and viral content that can spread quickly on social media platforms, time can be of the essence; waiting for someone to create a polished piece of work may simply not be an option.
The company's software includes artificial intelligence (AI) capabilities that can also help users make web apps and interesting content with ease. Its platform can help with coding, web development, and be a one-stop solution for all things design-related, making it little wonder why 95% of Fortune 500 companies use Figma's software. What may be even more noteworthy is that two-thirds of its monthly active users are not designers. That highlights just how simple and easy the software is to use.
Choppy and volatile earnings may be hurting Figma's appeal
Figma's biggest problem right now may be that its financials haven't been consistently strong. In its most recent period, which was the quarter ending June 30, the company reported an operating profit totaling just $2.1 million on revenue of $249.6 million. That was considerably less than what it reported a quarter earlier, when its operating income totaled $39.7 million. In previous years, Figma has incurred losses, and so there have been concerns about whether it can stay out of the red.
Investors may be thinking twice about the business in light of this volatility, but the company is still in the early stages of its growth. What's promising is the potential for greater growth on both the top and bottom lines in the future. This year, Figma is projecting its revenue to total approximately $1.02 billion, which would be an increase of 37% from the previous year. And its (adjusted) operating income will be within a range of $88 million to $98 million.
If it can continue to grow at a fast rate and show progress in its earnings, there could be plenty of room for the tech stock to rise a whole lot higher.
Why it may be too early to invest in Figma
While there's plenty of promise for Figma's business to grow in the long term as it wins over customers with its flexibility and low-priced software, it arguably still needs to prove that it can deliver strong profits. Right now, it isn't there yet, and until that changes, I'd take a wait-and-see approach with the tech stock as this is a competitive space, and with many companies offering AI-powered solutions, competition may be fierce and chip away at Figma's ability to turn a profit.
The safest option at this stage would be to wait at least a couple of quarters to see if Figma's business shows signs of greater stability, and then to reevaluate the stock afterwards. For now, it's hard to call the stock a bargain buy given all the uncertainty around the business, and I wouldn't rule out a further decline in share price in the near future.
