Figma Stock Slides After Earnings: Overreaction or Warning Sign?

Key Points

• Figma stock tumbled by double digits in its first report as a publicly traded company.

• The company beat estimates, but its guidance was disappointing.

• It launched a number of new products in Q2, which could pave the way to more growth.

• 10 stocks we like better than Figma ›

Figma (NYSE: FIG) dazzled investors by tripling in its debut in July, a clear sign of excitement about the design software stock, but its first earnings report gave investors a different taste of what to expect in the future, and shares fell by double digits on the news.

As of 12:01 p.m. ET on Thursday, the stock was down 16.1%, hitting a post-initial public offering (IPO) low as shares had already given back much of the early breakout gains.

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Figma is still trading more than 50% above its IPO price of $33, but it may be looking like a broken stock to those who bought it at a higher price.

Is Thursday's sell-off an overreaction worth taking advantage of, or is this a warning sign for the stock over the long term? Let's break down the second-quarter numbers before sizing up the opportunity with Figma stock.

Image source: Getty Images.

The debut report

Figma's second-quarter results were largely in line with estimates as it reported revenue growth of 41% to $249.6 million, slightly ahead of the analyst consensus of $248.7 million, and in line with preliminary results at $247 million to $250 million.

Other numbers indicated steady growth from the software company best known for user-experience and user-interface (UX/UI) design. Net dollar retention rate was 129% for customers with more than a $10,000 annual recurring revenue (ARR), meaning existing customers increased their spending on the platform. It also said more than 80% of its customers used two or more of its products in the quarter, and two-thirds of customers used three or more. That shows strong cross-sell and creates higher switching costs as customers are more likely to remain with Figma if they use more products.

On the bottom line, it remained profitable with an adjusted operating income of $11.5 million, or $2.1 million on a generally accepted accounting principles (GAAP) basis, in line with its guidance. On an adjusted-earnings-per-share basis, the company reported a profit of $0.09, ahead of the consensus at $0.08.

What seemed to sink the stock was Figma's guidance, which called for a substantial slowdown in the third quarter, forecasting revenue of $263 million to $265 million, or 33% growth at the midpoint, ahead of the consensus at $259.2 million. For the full year, it sees revenue of $1.021 billion to $1.025 billion, or 37% growth at the midpoint, which compares to estimates at $1.01 billion. It also called for adjusted operating income of $88 million to $98 million for the full year, down from $127.2 million in the quarter a year ago.

Management is likely being conservative with its guidance, and hinted at as much in its earnings report, allowing for some variance due to the recent introduction of new products. Given that this is its debut report, investors should weigh guidance less than they would with a more established company.

What else you should know

Figma isn't wasting any time on the product front. It launched four new products in the quarter: Figma Make for AI-driven prototyping; Figma Draw for richer visual design; Figma Sites, allowing publishing designs to go live as websites; and Figma Buzz, for creating marketing campaigns.

Management said those products doubled its product offering, but it also introduced some uncertainty in its forecast. Gross margin slipped to 90% and management said it could go lower due to investments in new products, and the company was uncertain about the growth rate for them going forward.

Still, given the successful rates for its existing products, the new launches should help drive growth for the company, even if they bring uncertainty in the near term.

Is Figma a buy, sell, or hold after its first earnings report?

Despite the sell-off, there were no red flags in Figma's debut earnings report. While the guidance may have been disappointing, it's understandable given that this is the company's first earnings report, and it's taking a conservative view, especially after launching several new products.

Figma stock came into the report trading at a price-to-sales ratio of 40, and now looks more reasonable at a P/S of 29. That's still expensive, but it's closer to what other high-growth software stocks have historically traded at.

At this point, buying a few shares of Figma seems like a prudent move for risk-tolerant investors. The stock could continue to fall, so saving some cash to deploy if it moves lower could pay off as well.

The long-term picture still looks promising for Figma. While it may take a few quarters for the company to find stability on the stock market, the business has an enticing combination of revenue growth, profitability, and a strong product portfolio. The initial excitement over the stock wasn't unwarranted.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.