Figma's Current Shares: Are They a Smart Investment Today?

Figma's Shares Worth Considering Purchase at Present?

Figma, the AI-first company revolutionising digital product design, has been making waves in the tech industry. Since its public debut, the company has experienced a rollercoaster ride, with significant highs and recent lows.

Figma's stock had a meteoric rise, soaring by 250% on its debut. However, since August, the stock has experienced a 42% drop, with a near 9% decrease on Aug. 25, highlighting the high expectations priced into the company's valuation.

Despite the recent downturn, Figma's financial performance, as detailed in its S1 filing, is impressive. The company's revenue for fiscal 2024 was $749 million, representing a 48% increase from the previous year. In the first quarter of its current fiscal year, revenue grew 46% year over year to $228.2 million.

Figma's gross margin last quarter stood at 91%, providing significant financial flexibility for growth. Maintaining this margin in the 90% range could be crucial for the company's future.

Net revenue retention in the first quarter of the current fiscal year was 132%, indicating a 32% increase in spending by customers compared to the same quarter the previous year. This is a testament to the value customers find in Figma's offerings.

Figma's tools are not limited to creating user interface (UI)/user experience (UX) flows, wireframes, and working prototypes. They are used by some of the biggest names in the tech industry, including Microsoft, Netflix, Dropbox, Airbnb, and Zoom Communications. In fact, 1,560 companies in the Fortune 2000 use Figma's tools, according to the company.

Analysts have been impressed with Figma's position in the market. William Blair analyst Arjun Bhatia states that Figma has "no second-place competitor that is even close to [its] ubiquity, market share, or feature functionality." JPMorgan analyst Mark Murphy calls Figma a "trailblazing technological innovator."

However, the company faces several key risks. A potential slowdown in revenue growth not fully mitigated by AI investments could be a concern. Competitive pressures in the design software market could affect long-term sustainability. The company's current price-to-sales (P/S) ratio of close to 42 is considered expensive, even for a high-growth tech company. To justify its current valuation, Figma would need to maintain around 40% annual revenue growth over the next few years.

As Figma prepares to announce its first earnings report as a public company on Sept. 3, it's recommended to wait for a few more quarters of results before considering it an obvious buy. The company's resilience and ability to navigate these challenges will be key to its future success.