Figma is coming public at an expensive level, says Jim Cramer

Key Concepts

• IPO (Initial Public Offering)
• Valuation
• Enterprise Software
• Annual Recurring Revenue (ARR)
• Net Dollar Retention
• Operating Income
• Free Cash Flow
• Rule of 40
• SaaS (Software as a Service)
• Generative AI
• Price-to-Sales Ratio

Figma IPO Overview

• Upcoming IPO: Figma, a design software company, is planning an IPO with an initial valuation of approximately $20 billion. This is the largest enterprise software deal since 2021.
• Hesitation: Despite the company's strong underlying business, there's hesitation to recommend the stock due to concerns it will become too expensive quickly. A buy is only recommended on weakness.

Figma's Business and Product

• Ubiquitous Software: Figma's design software is widely used, powering the design of products like Google Maps, Uber, JetBlue, Netflix, Duolingo, and LinkedIn.
• Client Base: Figma has 95% of the Fortune 500 as clients.
• Software Suite: Figma offers a suite of software that simplifies app and website design.
• Adobe's Interest: Adobe attempted to acquire Figma a few years ago, indicating the value of Figma's product. The deal was blocked by antitrust regulators.

Financial Performance

• Revenue Growth:
  • Last year: 48%
  • First quarter of this year: 46%
  • Second quarter (estimated): 39-41%
• Customer Base:
  • Over 10,500 customers paying more than $10,000 in ARR (up 45% year-over-year).
  • 963 customers paying over $100,000 in ARR.
• Net Dollar Retention:
  • 2024: 134%
  • 2023: 122%
  • First quarter of this year: 132%
• Profitability:
  • Operating income grew by 369% last year.
  • Operating income grew by 122% in the first quarter of this year.
  • Free cash flow is strong.

Rule of 40 Analysis

• Definition: The Rule of 40 is a benchmark for enterprise software companies, calculated by adding revenue growth and profit margin. A score above 40 indicates a solid business.
• Figma's Score: Figma easily passes the Rule of 40 due to its revenue growth around 40% and positive operating margin.

Market Dynamics and Concerns

• Contrasting Themes: The IPO market is hot, but enterprise software, especially SaaS companies, have been weak.
• Adobe Comparison: Adobe is the best comparison for Figma, given Adobe's previous acquisition attempt. Adobe's stock is down 41% from its recent high.
• AI Impact: Generative AI technologies are adept at writing code, potentially impacting enterprise software companies.
• Figma's AI Investment: Figma's CEO, Dylan Field, noted that AI spending could negatively impact the company's efficiency for several years.
  • Quote: "I spend will potentially be a drag on our efficiency for several years."
• IPO Proceeds: Two-thirds of the IPO proceeds are going to existing shareholders, with Figma using its share to pay down debt rather than invest in growth.

Valuation and Recommendation

• Price Range Increase: The IPO price range has been raised from $25-$28 to $30-$32.
• Oversubscription: The IPO is reportedly 40 times oversubscribed.
• Implied Market Cap: At the high end of the new price range, Figma has an implied market cap of roughly $19.4 billion.
• Valuation Concerns: Assuming 40% revenue growth this year, Figma could be valued at 20 times sales. Adobe trades at less than 7 times sales.
• Recommendation: There's a lot to like about Figma, but it's coming public at an expensive level. If the stock rises significantly after the IPO, it will be too pricey.

Voyager Technologies Example

• IPO Performance: Voyager Technologies had an IPO where shares doubled initially but later gave back a significant portion of those gains.
• Recommendation: The speaker suggests that this is precisely the time to start a position in Voyager, buying slowly as the stock falls.

Conclusion

The Figma IPO presents a compelling opportunity due to the company's strong product, impressive growth metrics, and market position. However, the high valuation and potential impact of AI investments raise concerns. The speaker recommends caution and suggests waiting for weakness before considering an investment. The example of Voyager Technologies illustrates the importance of patience and strategic entry points in volatile IPO markets.