Figma Stock: Is It Safer Than It Looks?

Figma's stock defies gravity—but is the safety net real or just investor fantasy?

Behind the Design Boom

Collaboration tools are eating traditional software. Figma's web-first approach cuts through legacy barriers like a hot knife through butter. Teams adopt it faster than you can say 'real-time editing.'

The Numbers Game

Valuations hit stratospheric levels while revenue multiples make old-school analysts choke on their coffee. Another tech darling priced for perfection—what could possibly go wrong?

Hidden Risks in Plain Sight

Competition lurks everywhere. Adobe's shadow looms large, while upstarts chip away at niche features. Enterprise contracts can vanish faster than a designer's patience with slow loading times.

Bull Case vs. Bear Trap

Growth trajectories look promising until you realize everyone's betting on the same 'digital transformation' narrative. Because nothing says safety like betting the farm on software that might get disrupted by the next big thing.

Final verdict: Figma might be safer than most tech stocks—but in this market, that's like being the tallest dwarf in the room.

Image source: Getty Images.

What Figma's recent earnings numbers say

On Sept. 3, Figma posted its second-quarter earnings. The company showed some excellent growth, with sales totaling $249.6 million for the period ended June 30. That was an increase of 41% year over year. Its net dollar retention rate (for customers whose annual recurring revenue is over $10,000) was 129%, which means that its Core customers are spending significantly more than they were a year ago.

These are all excellent growth signs for the business and show that customers are seeing value in Figma's products and services. In terms of cash flow, which can be more important than just profitability for a business in its early growth stages, things also look solid for Figma. Operating cash FLOW was a positive $62.5 million, which was a sharp improvement from the negative $178.2 million it burned through a year ago.

All in all, it was a solid quarter for the company, with the business still expecting a strong growth rate of around 33% for the third quarter.

Just how high is Figma's valuation?

Figma's market cap is right around $27 billion today. Before getting into earnings or revenue multiples, consider that just three years ago, software giantwanted to buy Figma for $20 billion as it saw a lot of potential growth for its collaboration tools and software. Figma is worth approximately 35% more than that right now, which is by no means outlandish given how hot the market has been in recent years. Thehas risen by 63% over that timeframe.

Arguably, the business may have already been inflated at such a valuation. But if you believe that Adobe was valuing Figma at a reasonable price in 2022, it may not necessarily be all that expensive today.

Currently, Figma's stock trades at 30 times its trailing revenue. In comparison, Adobe is at a price-to-sales (P/S) multiple of less than 7. Adobe is, of course, much larger in size and growing at a slower rate, and thus will command a lower multiple from growth investors. Meanwhile, Figma's forward price-to-earnings (P/E) multiple, which considers analyst expectations of how it will do in the coming year, is a whopping 286. But when a company's earnings are still limited, the P/E multiple can look incredibly high.

Is Figma's stock worth buying right now?

Due to Figma's falling share price, I believe there could be a good case to make for buying the tech stock right now. However, there's still some risk around it because the company's earnings WOULD need to improve for it to be a formidable investment option. My biggest concern is how the company's design and photo editing tools will stack up against those from other services, especially with artificial intelligence enabling companies to offer more advanced editing capabilities these days.

But with significantly improved cash flow, and impressive growth in excess of 30%, Figma is moving in the right direction, and consumers and businesses appear to love its products. I'd prefer to hold off and see if the company can make more progress on the bottom line, which was pretty well at breakeven this past quarter, before investing in it.

However, if you're a believer in its products and are OK with the risks I've noted above, Figma could turn out to be a good investment. Its valuation has come down to a point where it doesn't look extremely overvalued anymore. If it can continue to deliver strong growth numbers and also improve upon its bottom line, the P/E multiple will come down, and the stock could have a lot of room to rise higher.