Former Takeover Target Threatens Adobe's (ADBE) Clould Creativity Empire

Business Insider

5 days ago

Adobe (ADBE) is poised to encounter increased competitive pressure, partly of its own making. Figma, the cloud-based design platform that Adobe sought to acquire in 2023, is preparing for a $1.5 billion initial public offering (IPO). This move will enhance Figma's access to capital, providing critical support for its continued growth and market expansion.
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Notably, Adobe was required to pay a $1 billion breakup fee following the failed acquisition attempt. The timing of Figma's IPO is particularly significant, as Adobe's revenue growth has slowed from 15–25% in previous years to just 11%, contributing to recent pressure on its stock performance.
Additionally, there is growing sentiment that generative artificial intelligence (AI) tools may be narrowing Adobe's competitive moat. However, Adobe remains proactive in defending its leadership in the creative software space, leveraging its innovation capabilities and extensive ecosystem. Given the balance of emerging risks and potential opportunities, I maintain a Neutral outlook on ADBE.
Figma's Ascent: A Formidable Competitor Emerges
Figma officially filed for its IPO with the SEC via an S-1 registration statement earlier this month, marking a significant milestone for the fast-growing design platform. Its business is thriving—revenue surged 48% to $749 million in fiscal year 2024, with first-quarter revenue rising 46% year-over-year to $228.2 million. A net dollar retention rate of 132% reflects strong customer loyalty and product engagement.
Adobe's interest in acquiring Figma in 2022 now seems even more justified. However, the deal was terminated a year later amid regulatory antitrust concerns, resulting in a $1 billion breakup fee paid to Figma. This infusion of capital further strengthened Figma's ability to scale independently.
Best known for its browser-based, real-time collaboration tools, Figma has since expanded into adjacent offerings, including Figma Sites (no-code website creation), Figma Make (AI-driven code generation), and Figma Draw (vector editing)—many of which directly compete with Adobe products, such as Illustrator.
While Figma's scale is still modest compared to Adobe's 2024 revenue of $21.5 billion, it remains a formidable challenger in the creative software space. Its IPO is expected to accelerate its growth trajectory and broaden its market presence.
AI Threatens to Democratize Creativity
In addition to competitive pressure from platforms like Figma and Canva, the creative software industry is being rapidly reshaped by the rise of generative AI tools such as Midjourney, OpenAI's Sora, and RunwayML. These solutions are particularly valuable in the early 'ideation phase' of content creation and are widely accessible, with pricing ranging from $20 per month to $1,500 per year.
Their growing influence on Adobe's traditional offerings is significant. Many argue that these tools are democratizing creative capabilities, lowering barriers to entry for individuals and small teams. With tens of billions of dollars being invested in AI innovation, even an industry leader like Adobe may find it increasingly challenging to maintain its competitive edge in this rapidly evolving landscape.
Adobe's Counter-Offensive: Firefly and AI Integration
That said, Adobe is actively incorporating AI to enhance its product offerings. At the center of its AI strategy is Firefly, a suite of generative tools that includes features such as generative fill and expand, AI-assisted workflows, and text-based editing.
A key differentiator is Adobe's emphasis on the commercial safety of Firefly, positioning it as a more secure alternative to other generative AI tools—such as those from OpenAI—which have faced concerns around copyright and content sourcing.
This focus on reliability and legal clarity appeals particularly to enterprise clients and established organizations that prioritize compliance and risk mitigation, even at a premium. Additionally, Firefly is integrated with major partners, including Google Cloud and OpenAI, expanding its reach and functionality within Adobe's ecosystem.
Financial Fortitude: Adobe's Stable Foundation
surpassing 37 million paid subscribers by the end of 2024, according to the most recent data sourced by TipRanks. Flagship products, such as Photoshop, continue to be widely adopted by creative professionals worldwide. From a financial standpoint, Adobe is performing exceptionally well. In the second quarter of fiscal year 2025, the company posted record revenue of $5.87 billion.
Operating cash flow reached $2.19 billion, representing a robust margin of 37.3%. High margins remain a key strength for Adobe, with a free cash flow margin of 36.83%—significantly outperforming the Information Technology sector median of 11.66% by over 215%.
Despite these strong fundamentals, Adobe trades at a relatively modest valuation. Its current Price-to-Earnings ratio of 24.3 is below the sector median of 29.19, suggesting that the market may be factoring in expectations of slower growth ahead.
What is the Price Target for ADBE?
On Wall Street, the consensus rating on ADBE is Moderate Buy based on 19 Buy, seven Hold, and two Sell ratings in the past three months. T he stock's average price target of $484.88 implies a 26% upside potential over the next twelve months.
Following Adobe's fiscal second-quarter results, Citi lowered its price target on ADBE from $465 to $450 while maintaining a Hold rating. The firm acknowledged Adobe's initial progress in monetizing AI as encouraging but expressed caution, citing uncertainty around the sustainability of its AI-driven growth. Citi pointed to fluctuating pricing strategies in fiscal 2025 and what it described as a 'seemingly diminishing' market and mindshare for Adobe's AI models as key concerns.
Adobe at a Crossroads: Maturing Growth Meets Rising AI Competition
Adobe faces a range of challenges. Growth in the creative software market appears to be entering a mature phase, which has weighed on investor sentiment and stock performance. The market no longer prices ADBE as a high-growth stock; its P/E ratio—once consistently around 50 since 2015—has been roughly halved. The failed acquisition of Figma may also have long-term competitive implications. Additionally, the rise of generative AI tools poses a threat to Adobe's moat, particularly among individual creators and small to mid-sized businesses.
That said, Adobe remains a highly profitable enterprise and a trusted leader in the creative software market, which is projected to grow at a 7.1% annual rate. The company's efforts to adapt—highlighted by its AI-driven Firefly platform—demonstrate its commitment to innovation and relevance in a rapidly evolving landscape. Combined with a more reasonable valuation, these strengths make it challenging to adopt an overly bearish stance. All things considered, my outlook on ADBE is Neutral.