Adobe Faces Regulatory Challenges for AI Expansion with Figma Acquisition: Analyst

JMP analyst Patrick Walravens maintained a Market Perform rating on Adobe Systems, Inc ADBE.

The company continues to face heavy global antitrust resistance to its proposed acquisition of Figma, Inc after Adobe notified the EU of Adobe’s intention to acquire sole control and after Adobe’s stock has increased 44% year to date versus 15% for the S&P 500.

This notification filing to the EU comes more than nine months after Adobe’s September 15, 2022, press release announcing the deal, partly because the proposed transaction does not reach turnover (revenue) thresholds set by EU Merger Regulations. 

Still, it did meet the thresholds for Austria and Germany, so Adobe notified them last year, and those countries and others subsequently submitted a referral request to the European Commission.

On February 15, the European Commission accepted that request to assess the transaction, stating that “the transaction threatens to significantly affect competition in the market for interactive product design and whiteboarding software.” 

Post the notification, the European Commission now has a provisional deadline of August 7 to decide whether to clear the acquisition based on its first investigative phase or to move to a more detailed phase II investigation, which He thinks is the likely outcome.

Concerning the U.S. Department of Justice investigation of the proposed transaction, Bloomberg reported in February that the DOJ was preparing to file a lawsuit to enjoin the acquisition. Business Insider published an article on June 12 titled, “Adobe Lawyer Tells Staff Not to Delete Anything Related to Figma Deal,” which may suggest Adobe is anticipating litigation, and investors, Adobe, and enforcement authorities are all likely waiting to see how Judge Jacqueline Scott Corley rules in the Microsoft Corp MSFT/ Activision Blizzard, Inc ATVI matter, where hearings occurred at the end of June in San Francisco. 

The bad news for Adobe is that the evolution of global competition regulation does not favor big tech companies seeking to acquire innovative, emerging rivals who do not directly compete with the acquirer today but may in the future, while the good news is that since this deal was announced nearly ten months ago, the attention has shifted to the opportunity presented by large neural networks like LLMs and AI image generators. Adobe is exceptionally well positioned in this area with its Firefly family of creative, generative AI models. 

Walravens maintained his FY23 non-GAAP EPS estimate of $15.70 (consensus $15.73) on revenue growth of 10% Y/Y, FY24 non-GAAP EPS estimate of $17.63 (consensus $17.78) on revenue growth of 10% Y/Y.

He believes Adobe is fairly valued, as the company trades at CY24E P/ E and EV/revenue multiples of 27.5x and 10.3x versus large-cap technology peer group median multiples of 20x and 5.3x, respectively.

Price Action: ADBE shares traded higher by 1.85% at $494.2 on the last check Monday.