A Crosswind Is Blowing Against Adobe's Cloud

Questions about the short term are raised by the economic downturn and the Figma agreement.

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Red down pointing triangle with Adobe ADBE -0.62%decrease has definitely had a bright future with AI. Nevertheless, it must first pass past the present.

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Adobe is feeling the pressure of a global economic recession that is restricting corporate technology expenditures, just like its competitors who sell digital to business customers. The company's revenue increased 11.5% for the fiscal year that ended in November, the slowest yearly growth rate in the previous eight years. In fact, analysts predict that the fiscal first quarter, which ended in February, would follow the same pattern, with sales rising by just 8.5% on a yearly basis to $4.6 billion. Since 2014, Adobe hasn't experienced quarterly growth that low.

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Nevertheless, when the business releases its first-quarter results on Wednesday, Adobe's financial performance will just be a portion of the tale. The business announced its $20 billion acquisition of Figma six months ago, which is four months more than it took Adobe to finalize its second-largest deal ever, the $4.8 billion purchase of Marketo in 2018. Since then, the regulatory landscape has become substantially more rigid; the FTC has filed a lawsuit to stop Microsoft from acquiring Activision Blizzard, and Trade Algo just reported that the Justice Department intends to file a similar lawsuit to stop Adobe from acquiring Figma.

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That has cast a darker shadow over a purchase that wasn't initially popular with investors. Since the Figma acquisition was announced, Adobe's share price has fallen more than 11%, a decline that is much worse than the approximately 2% decline seen by the S&P 500 Software & Services Group during the same period. Given that it represents roughly the last three years' worth of total free cash flow, the deal is definitely pricey for Adobe. But, several analysts now think that Figma is crucial to Adobe's future, upping the stakes for the business if it is unable to close the deal.

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Software designers with a focus on user interfaces can use Figma's web-based tools. Users of the program may easily collaborate with coworkers who are located in different places because it is hosted on the cloud, a feature that is not native to many of Adobe's flagship services utilized by creative professionals. According to a research published last month by Sterling Auty of MoffettNathanson, blocking the Figma transaction would be "materially detrimental" for Adobe since the architecture of Figma might accelerate Adobe's efforts to fully cloud-enable more of its products. 

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In addition to contributing to Figma's existing company, the acquisition may expand Adobe's market. Every creative worker who participates in the design process interacts with an average of 17 additional colleagues, many of whom aren't actual designers, according to Alex Zukin of Wolfe Research. So, the firm has a chance to increase the number of those collaborators "on to its platform within that workflow and move them up the value curve" by adding more collaboration features to Adobe's other services.

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The recent surge in popularity of generative AI tools like ChatGPT and Dall-E has also prompted fresh concerns about Adobe's future. Such tools, which can perform tasks like producing an image based on a user's description, might put "price pressure on Adobe as open source AI tools become competitors," according to a note to clients written by UBS analyst Karl Keirstead last month. 

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But, Adobe also has the biggest financial resources among software companies serving the creative industry, which gives the business an advantage in implementing pricey AI technologies. Brad Zelnick of Deutsche Bank is even more upbeat, writing in a report on March 8 that having adopted generative AI capabilities into its products is "a key opportunity for Adobe, in terms of generating more demand and usage of its apps." Mr. Keirstead added that "the disruption risk is low" because Adobe is "more likely to leverage this technology."

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Figma would nevertheless be a crucial component of this mixture. "We see Adobe's generative AI as still quite interesting, but potentially less so than if integrated," Mr. Zelnick stated. "Without Figma, or a found similar results collaboration platform, we see. The stakes for Adobe's largest deal ever seem to keep rising.