AI-Led Design Workflows Will Secure Long-Term System Of Record Leadership

Catalysts

About Figma

Figma provides a collaborative, browser-based platform for design, prototyping and related workflows across product, brand and development teams.

What are the underlying business or industry changes driving this perspective?

• Rapid adoption of AI native workflows such as Figma Make, Prompt to edit and MCP is pulling more design adjacent roles into the platform, which can widen the paid user base and support revenue and net dollar retention over time.
• The shift toward design led differentiation in software and brand experiences, with more than 70% of customers already using three or more products, positions Figma as a central system of record that can support higher average contract values and more stable multiyear revenue streams.
• The trend toward integrated idea to production workflows, where customers like Flipkart and Rivian run brainstorming, design, prototyping and developer handoff in one place, can reduce customer tool sprawl and support higher seat counts and usage driven revenue.
• Growing enterprise demand for secure, governed collaboration, highlighted by uptake of Governance Plus and the preference of customers like Okta for enterprise grade controls, can support mix shift toward higher value offerings and help sustain operating margins.
• Expanding AI content creation and editing needs across creative and product teams, including use cases supported by Weavy, Buzz and broad third party integrations, can increase the volume of work flowing through Figma and contribute to revenue growth and potentially higher earnings over time.

Assumptions

This narrative explores a more optimistic perspective on Figma compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Figma's revenue will grow by 24.2% annually over the next 3 years.
• The bullish analysts are not forecasting that Figma will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Figma's profit margin will increase from -95.6% to the average US Software industry of 12.3% in 3 years.
• If Figma's profit margin were to converge on the industry average, you could expect earnings to reach $229.1 million (and earnings per share of $0.38) by about January 2029, up from $-926.1 million today.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 311.2x on those 2029 earnings, up from -20.0x today. This future PE is greater than the current PE for the US Software industry at 32.2x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.43%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Figma is investing heavily in AI native workflows such as Make, Prompt to edit and MCP, which are currently impacting gross margin through higher infrastructure and inference costs. If monetization via credits or consumption based pricing is slower or weaker than expected, the company could face sustained pressure on gross margin and operating margin, limiting future earnings.
• The business is positioning itself as a system of record for design and product development, with 70% of customers already using three or more products and a growing mix of multiyear deals. Any slowdown in enterprise software spending, seat expansion or design headcount over the long term could weigh on new customer additions, net dollar retention of 131% and revenue growth.
• Figma relies on broad adoption of AI tools like Make across large customers, with about 30% of customers spending US$100,000 or more in ARR using Make weekly. If AI led design and prototyping workflows do not become as widely embedded as expected, or competing tools address those use cases more effectively, usage and upsell potential into higher value tiers could be weaker, affecting revenue and free cash flow.
• The company is absorbing a large stock based compensation expense as part of its go public process and expects several quarters before this normalizes. At the same time, it is targeting long term market leadership and continued hiring, which could keep GAAP net losses elevated and increase dilution, affecting earnings per share and potentially constraining future investment flexibility.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Figma is $92.12, which represents up to two standard deviations above the consensus price target of $59.44. This valuation is based on what can be assumed as the expectations of Figma's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $96.0, and the most bearish reporting a price target of just $38.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $1.9 billion, earnings will come to $229.1 million, and it would be trading on a PE ratio of 311.2x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $37.33, the analyst price target of $92.12 is 59.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.