Figma (FIG) has been one of the worst-performing software stocks since its IPO, with shares plummeting from a peak of $143 to a current price of $19. The company's market capitalization has shrunk from $60 billion to approximately $10.2 billion, raising questions about whether the stock will continue to decline or eventually recover.
Growth Concerns and SaaSpocalypse Fears
The sharp decline in Figma's stock price reflects broader concerns about the software industry, often referred to as the 'SaaSpocalypse.' Investors worry that artificial intelligence tools, such as ChatGPT and DeepSeek, could disrupt traditional software companies by enabling users to create graphics and designs without specialized platforms. This sentiment has weighed on Figma, along with peers like Salesforce, Adobe, and ServiceNow.
However, Figma's financial results tell a different story. In the first quarter, the company reported revenue growth of 46% year-over-year, reaching $334 million. Notably, its net dollar retention rate improved to 139%, indicating that existing customers are spending more. The number of paid customers with an annual recurring revenue (ARR) of $10,000 or more rose to 15,218, up from 9,000 in the second quarter of 2024. Similarly, customers with ARR of $100,000 or more increased to 1,525 from 1,000 in the same period last year.
Profitability and Valuation Concerns
Despite strong top-line growth, Figma reported a net loss of $142 million in the first quarter, a sharp reversal from a $44 million profit a year earlier. The loss was driven by increased operating expenses, with research and development costs rising to $172 million, sales and marketing to $125 million, and general and administrative expenses to $103 million. On a positive note, the company generated an adjusted free cash flow of $89 million and an operating profit of $52 million.
Using the rule-of-40 metric, which combines revenue growth and profit margin, Figma scores 51% (35% forward revenue growth plus 16% operating margin), suggesting the stock may not be as overvalued as its price decline implies. Analysts remain bullish, with JPMorgan setting a price target of $42, while RBC, Piper Sandler, Morgan Stanley, and BTIG have targets above $35.
Technical Analysis Points to Further Weakness
From a technical perspective, Figma's stock has been trading below a descending trendline that has been in place since December last year. The shares are also below all major moving averages, indicating that bears are in control. A descending triangle pattern has formed, which is typically a bearish continuation signal. This suggests that the stock may experience further near-term pressure, potentially dropping to the key support level of $15.
If the stock reaches that level, it could stage a strong comeback in the long term as fears of AI disruption subside and the company's growth trajectory becomes clearer. For context, similar patterns have been observed in other beaten-down stocks, such as Rocket Lab and Palantir, which have shown signs of recovery after reaching key support levels.
Outlook
While Figma's near-term outlook remains uncertain, the company's strong revenue growth, high customer retention, and reasonable valuation based on the rule-of-40 suggest that the sell-off may be overdone. Investors should monitor the stock's ability to hold the $15 support level and watch for catalysts such as earnings reports or product announcements that could shift sentiment. As always, it is important to consider the broader market context, including the performance of other software stocks and the evolving impact of AI on the industry.
This article is for informational purposes only and does not constitute financial advice.
