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One recent IPO I’ve had my eye on is the design software, Figma. It checks a ton of boxes – founder led, huge runway, growing 40%+, 90%+ gross margins, GAAP EBIT profitable and strong cash flow conversion and a rock-solid balance sheet.The cherry on top is that the biggest player in the industry, Adobe, tried to buy them for $20 billion but it got broken up by antitrust concerns. That might be a sort of “floor” for the stock, which is about 30% lower than where it currently trades. When a company that does less than $1 billion in revenue has such a great product that it’s considered an anticompetitive risk, that’s interesting!
The fully diluted valuation is about $30 billion at $57/share, which is down from the brief highs of $135. That doesn’t mean anything and we shouldn’t anchor to the higher price because that was blatant FOMO, but it’s just starting to get to the point where my eyes aren’t bleeding at the valuation anymore. At 33x TTM sales and ~25x forward EV/sales it’s obviously still very expensive but Figma is a special asset – one to keep an eye on.
I find that it’s helpful to do the work on very high-quality businesses and then just wait until the valuation gets to a point where your return expectations surpass your hurdle rate. And if it never hits a reasonable valuation, then that’s fine. There is an opportunity cost though. If you maintain a very high hurdle rate, that’s probably the best thing to do but you need to be very aware of how hard it is, psychologically, to make like one decision every year.
Back to Figma – pre-IPO, there was some chatter about how AI is changing design and Figma won’t be as important since it’s so easy to create stuff these days. I think that’s a flimsy thesis since Figma can easily embed genAI into its platform. It’s more about the collaboration, fine-tuning, and ease of use. Software companies that are very embedded in the lives of users aren’t going anywhere despite the worries out there. For software companies that are extremely easy to replicate with low gross retention rates, they should be very worried though. It seems like Figma is the former and I’ll be waiting until we get some better prices. At the same time, I can’t imagine the valuation reaching $20 billion anytime soon.