Shares of collaborative software company Figma have declined 60% from their post-IPO peak, a significant drop driven by investor concerns over slowing growth projections, intense industry competition, and a high stock valuation. Despite a strong second quarter, the company's forecast for the upcoming period has tempered market enthusiasm.
Key Takeaways
- Figma's stock price has fallen 60% from its highest point after its Initial Public Offering.
- The company forecasts slower revenue growth of 33% for the third quarter, down from 41% in the second quarter.
- Figma faces significant competition from established players like Adobe and fast-growing rivals such as Canva.
- The stock's high price-to-sales ratio of 31 is a key point of concern for investors, especially when compared to peers.
Analyzing Figma’s Financial Performance
Figma's stock volatility follows its first earnings report as a public company. The San Francisco-based firm went public in July and saw its shares initially surge before a sharp reversal. The primary catalyst for the decline was the company's financial guidance issued on September 3.
For its second quarter, Figma reported revenue of $249.6 million, a 41% increase year-over-year. This figure narrowly surpassed analysts' expectations of $248.8 million. However, the positive result was overshadowed by the company's projections for the future.
Understanding Net Dollar Retention
Net Dollar Retention Rate (NDRR) is a critical metric for software companies. It measures revenue growth from existing customers over a period, accounting for upgrades, downgrades, and cancellations. A rate above 100% indicates that revenue growth from current customers is outpacing any losses.
Figma projected third-quarter revenue to reach $264 million, which represents a growth rate of 33%. This slowdown from the previous quarter's 41% growth raised concerns among investors who expect sustained high-speed expansion from newly public tech companies.
Another key metric, the Net Dollar Retention Rate, also showed a slight decline. It fell to 129% in the second quarter from 132% in the prior quarter. While still a very strong figure, the downward trend contributed to market apprehension.
Company Leadership Remains Confident
Despite the market's reaction, Figma's management expressed optimism about the company's trajectory. They highlighted the underlying strength of the business and continued investment in key areas like artificial intelligence.
"Our performance this quarter highlights the strength of our business and the critical value of design," Figma CFO Praveer Melwani stated in a news release. "We delivered best-in-class revenue growth and positive operating margin as we kept investing in AI and expanded our platform."
Melwani also pointed to the 129% Net Dollar Retention Rate as evidence that customers are increasing their spending on Figma's platform. The company's ability to maintain a positive operating margin while investing for future growth was presented as a key strength.
For the full year of 2025, Figma has forecast total revenue of $1.023 billion. Achieving this target would represent 37% growth compared to the $749 million in revenue generated in 2024. The performance in the remaining quarters will be closely watched to see if the company can meet this annual goal.
The Competitive Environment
Figma operates in a highly competitive market for design and collaboration software. While it holds a leading position, it faces pressure from both established giants and nimble, fast-growing competitors.
Market Share Breakdown
According to data from 6sense, Figma leads the collaborative design and prototyping category with a 36.88% market share. In comparison, Adobe XD holds a 10.42% share of the same market.
Adobe Remains a Formidable Rival
Adobe, a dominant force in the broader design software industry, is Figma's most direct competitor. In 2023, a proposed $20 billion acquisition of Figma by Adobe was terminated due to regulatory challenges. While the deal did not proceed, it underscored the competitive threat Figma poses to Adobe's business.
Adobe possesses a vast product ecosystem and a large, established customer base. Its ability to bundle products and leverage its market position presents an ongoing challenge for Figma.
The Rise of Canva
Canva has emerged as another significant competitor, particularly in the broader graphic design space. The company reported $2.7 billion in revenue for 2024, reflecting 35% growth. Canva's user-friendly tools appeal to a wide audience, from individuals to large businesses.
Recent reports indicate Canva was valued at $42 billion in a private stock sale, substantially higher than Figma's current market capitalization. Furthermore, Canva's hiring of Zoom's former chief financial officer has fueled speculation about a potential IPO, which would provide it with significant capital to further challenge Figma.
Valuation and Analyst Outlook
A central issue for investors is Figma's stock valuation. The company trades at a high price-to-sales (P/S) ratio of 31. This is significantly higher than many of its peers.
For comparison, Adobe's P/S ratio is approximately 7. While investors often grant higher valuations to companies with faster growth, Figma's 41% Q2 growth versus Adobe's 10% may not fully justify the large premium in the eyes of some market participants.
Wall Street analysts are currently divided on the stock's prospects. The average 12-month price target from nine analysts is $67.57, suggesting a potential upside of 18.9% from current levels, according to TipRanks. However, following the latest earnings report, four prominent firms—BofA, Morgan Stanley, RBC Capital, and Wells Fargo—lowered their price targets on the stock.
Some analysts remain bullish. Arjun Bhatia of William Blair noted that Figma's results were largely in line with expectations and suggested the company's forward guidance might be conservative. If Figma can outperform its own forecasts in the coming quarters, the stock could see a recovery. However, any failure to meet these targets could lead to further declines given its high valuation.
