AI Infrastructure And Governance Risks Will Challenge Margins Yet Platform Adoption Should Strengthen

Catalysts

About Figma

Figma provides a collaborative platform for designing, prototyping and shipping digital products across web, mobile and other interfaces.

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

• Although Figma is riding a structural shift toward AI assisted creation, heavy ongoing inference spend without meaningful near term consumption monetization risks compressing gross margins and delaying the translation of AI usage into earnings growth.
• While the move to make Figma the system of record for end to end product design aligns with the long term digitization of workflows, deeper enterprise standardization requires sustained investment in governance and compliance that could outpace revenue expansion and pressure operating margins.
• Although AI native tools like Figma Make are expanding the user base beyond designers into product managers and researchers, many of these new cohorts are early stage and may monetize slowly, creating a lag between user growth and durable revenue per customer.
• While growing integrations with large model providers and developer tools embed Figma more deeply into software development, this reliance on third party AI ecosystems exposes the company to pricing, technical and strategic shifts that could increase infrastructure costs faster than top line growth.
• Although international demand and multiproduct adoption are accelerating, scaling sales, support and infrastructure globally to meet AI intensive, real time collaboration needs may require elevated capital and operating expenditures that temper free cash flow and net income growth.

Assumptions

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

• The bearish analysts are assuming Figma's revenue will grow by 21.5% annually over the next 3 years.
• The bearish 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 12.7% in 3 years.
• If Figma's profit margin were to converge on the industry average, you could expect earnings to reach $221.6 million (and earnings per share of $0.37) by about December 2028, up from $-926.1 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 181.7x on those 2028 earnings, up from -20.8x today. This future PE is greater than the current PE for the US Software industry at 31.9x.
• The bearish 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 8.45%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Heavy and rising AI infrastructure and inference costs, alongside management's stated willingness to trade near term margin for long term platform investments, could structurally cap gross margin improvement and compress operating leverage over time, limiting future earnings growth and net income.
• If Figma fails to successfully implement and scale its planned AI consumption based pricing model, particularly after signaling that current AI usage is not being fully monetized, long term revenue growth could lag underlying usage trends and weigh on free cash flow and profitability.
• As more non designers and adjacent personas adopt Figma Make and other AI tools at a rapid pace, there is a risk that these newer, lower ARPU cohorts monetize more slowly than expected, which could dilute average revenue per customer and temper overall revenue and earnings expansion.
• Escalating competition from other AI native design and prototyping tools, including prompt based interfaces that sit closer to foundational models, may erode Figma's ability to command premium pricing and sustain strong net dollar retention, pressuring both top line growth and net margins.
• Ongoing investment in international expansion, new product surfaces like Buzz and Weavy and expanded enterprise governance features may require elevated sales, R&D and infrastructure spending for longer than anticipated, which could keep operating margins and free cash flow margins below investor expectations.

Valuation

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

• The assumed bearish price target for Figma is $52.0, which represents up to two standard deviations below the consensus price target of $65.25. 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 more bearish 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 $52.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $221.6 million, and it would be trading on a PE ratio of 181.7x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $38.86, the analyst price target of $52.0 is 25.3% 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.