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Adobe-Figma deal: 'I've never seen a level of investor hatred' like this, analyst says

Jefferies Equity Research Analyst Brent Thill assesses Adobe's deal to acquire Figma amid its third-quarter revenue beat, while looking at investor responses, the climate of the tech sector, and Amazon's NFL streaming deal.

Video Transcript

[AUDIO LOGO]

SEANA SMITH: Adobe shares taking a very hard hit. You can see the stock off just around 17%, the biggest drop that we have seen in 12 years. Now the stock plunging on mixed guidance, and also its deal to buy design platform Figma for $20 billion.

We want to bring in Brent Thill. He's Jefferies Equity Research Analyst. He joins us now. And, Brent, you look at the Street's reaction, obviously a little bit of a concern about the price that Adobe is paying for this company. What's your reaction?

BRENT THILL: It's a shocker. I think this company has been incredibly disciplined on their capital allocation. They've never chased a transaction with this type of multiple. And investors right now are hate selling the stock. There's no buyers on our desk, nothing but sellers, long onlies, upset that they would do this.

And I think when we talk about a technology industry that is facing multiple compression that they would go on and spend 50 times revenue-- even if you double the company's revenue, they're still going to pay 25 times revenue-- I think most investors are, like, there's something wrong. Like, this is defensive. There's got to be something underneath the cover that they had to do this. And why would you do this right now? Assuming the environment gets worse before it gets better, you got time.

So there's a lot of things that are not adding up. I've covered this company for a long time. I defended them when Steve Jobs came after them when he was alive bashing Adobe Flash when stock was $30 and it went to $700. I've been along for the ride. I've never seen anything like this from them.

So I would say that put this one up as a head-scratcher, and they're paying for it. Like, the market cap's off more than the value of the deal, and that just pretty much sums it up right now. So the results were OK. Stock would not have been down as much on just the results.

So if you separate the results and the deal, this is probably 75% deal-related, 25% related to the numbers. They could have cut guidance last quarter. They chose not to. They had a free hall pass. Everyone said to the CFO, hey, the economy is getting worse, why are you holding on to this guide?

And, you know, so there's been a couple blunders. This is-- at the end of the day, this is a phenomenal management team with a phenomenal franchise and is beloved by their customers. And so I think this will-- this cloud will dissipate at some point. But right now, I've never seen the level of investor hatred towards a transaction that they've done. There's been a couple of head-scratchers in the past, but nothing like this.

RACHELLE AKUFFO: Hatred, obviously a strong word there. So as you said that this raises issues about what might be under the hood that's going on there at Adobe, what is it then that Figma could potentially bring to the table? Were there any weaknesses that you think that Figma can really help strengthen Adobe with?

BRENT THILL: I mean, it's all about the design at the front end of it, right. So Figma has a great ability to take a concept and whiteboard it, and then bring it from the whiteboard into the actual layout of the design, and then bring it effectively, probably, into Adobe at some point. So Adobe was competing here, had a product for years. Many clients that we spoke with had both Figma and Adobe.

And so I think many-- many believed-- there were two competitive threats that they faced in creative. It's Canva at the low end and then Figma in design. And so Figma has won the hearts and minds of these designers. They love it. It wasn't that they disliked Adobe. They just didn't feel like Adobe was doing what they could have been doing here.

So I think many people are kind of wondering, why spend that kind of money when Adobe can build it? Where's the organic innovation? Why do you have to spend this kind of money in the tech-- the tech wreck we're in right now? Why would you go out and spend that?

So this is a head-scratcher for a lot of our clients, and you're seeing it, as a result, on the stock price. And, unfortunately, it's going to cause dilution now for the next two years. So this is not a short-term impact. This is a long-term turbulence that investors are going to have to live with.

I guess the good news now is sentiment's so negative right now that might be the best sign for long-term investors to start picking away. We were wrong. I didn't think they would have this negative reaction. We were wrong.

But I think we're right about the belief in the fundamental franchise, which is this still is a 15% to 20% long-term grower with a 30-plus margin. It's a wonderful business. It's run by the best management team. And I've said this repeatedly, if I left Wall Street, Adobe would be the first place I would knock on the door to work at. It's a great company.

DAVID BRIGGS: Perhaps at this point, you're hoping for regulatory issues down the road. Brent, you also cover Amazon. What does the streaming NFL debut mean for the investor story? And how do you think the Street will gauge success for Amazon in the entry?

BRENT THILL: It's a rounding error. It's really doesn't mean a lot. I think, ultimately, it's a nice-to-have. They're clearly putting a lot more money into content. I think it helps their advertising business. There's no doubt, like it-- it's a helper. But, again, it's a rounding error relative to their overall business.

RACHELLE AKUFFO: All right. Well, great having you on. Brent Thill there with that breakdown, Jefferies Equity Research Analyst. Thank you for your time this afternoon.