Figma vs. Adobe: What's the Better Tech Stock to Buy?

Key Points

• Figma generated 41% revenue growth in its most recent quarter, and its low-cost design software gives consumers a viable alternative to higher-priced options.

• Adobe is a leading company in design software, but its stock has been in a tailspin for the past year, and it now trades at just 15 times its estimated earnings.

• 10 stocks we like better than Adobe ›

Figma (NYSE: FIG) and Adobe (NASDAQ: ADBE) could have been one large company if not for a failed acquisition attempt a couple of years ago. Adobe recognized the potential that Figma possessed and wanted to buy the company for $20 billion. But due to competition-related concerns, regulators pushed back on the deal, which ended up falling through.

The two companies remain separate, and you can have your choice as to which business to invest in. On the one hand, you've got the smaller, newer company in Figma, which has a market cap of around $26 billion. And on the other, you've got the big, established tech giant, Adobe, which is worth nearly $150 billion but has been struggling to generate a lot of strong, consistent growth in recent years.

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Which one is the better tech stock to buy today? Let's find out.

Image source: Getty Images.

The case for Figma

Figma's design software focuses on ease of use and collaboration, making it an appealing option for teams. The software is also far cheaper than Adobe's (its lowest plans cost less than $20 per month for a full suite of products, while it can easily be upwards of more than $60/month for Adobe's Creative Cloud Pro option), making it a more suitable option for cost-conscious customers.

The company has also been generating some tremendous growth. Its sales for the period ended June 30 totaled $249.6 million, an increase of 41% year over year. And the business, which is still in its early growth stages, is already profitable, as it posted an operating profit of just under $2.1 million for the quarter. It's also strong from a cash flow perspective, with adjusted free cash flow totaling $60.6 million in the most recent quarter.

Figma's net dollar retention rate is 129% for customers with annual recurring revenue of $10,000 or more, which is another great sign that the company's growth may remain strong for the foreseeable future.

The case for Adobe

Adobe's software is more expensive than Figma's, but there's a good reason why: its top-tier software that is known around the world. Photoshop has been synonymous with photo editing and is the ultimate option for professionals to rely on.

The company's growth has slowed over the years, but this is also a massive company; it's a lot more difficult to generate a high level of growth when you're amassing billions in revenue. In its most recent quarter, which ended on Aug. 29, Adobe's revenue came in just under $6 billion and rose by 11% year over year. Its operating income totaled $2.2 billion and was an impressive 36% of revenue. The company's strong margins give it a lot of flexibility, should it need to cut prices in order to drive more growth in the future.

Adobe has incorporated AI into its tools and software, and that looks to be paying off early on. With the tech stock trading at a fairly low forward price-to-earnings multiple of 15 and a price-to-earnings-growth multiple of just 1, it is a potential bargain buy right now.

Why I'd go with Adobe

Adobe is a proven name in tech, and while its software is more expensive than Figma's, that has enabled it to secure strong margins. Figma makes sense if you have a team of designers. But for serious photo editors and professionals, Adobe may be the default option. Plus, with high profit margins, the company could possibly reduce prices if it needs to in order to protect market share and still produce solid profits.

What seals the deal for me is Adobe's discounted valuation. In the past year, it has lost 35% of its value. Between a slowing growth rate and concerns related to AI, there's some risk with the stock, but at such a steep reduction in value, it gives investors some attractive margin of safety, making it the more compelling option to invest in today.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe. The Motley Fool has a disclosure policy.