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Design software company’s strong growth could be undercut by AI, competition and untested products.

After two blockbuster tech initial public offerings, investors are positively drooling over Figma’s upcoming listing. The design software company is expected to launch into a surprisingly hot market for tech offerings led by CoreWeave and Circle, which are up more than 200% and 600%, respectively, since they started trading.

Figma boasts blazing-fast sales growth: 46% in the first quarter, outshining the rest of the software industry. It has grown into a veritable cash machine. And Adobe’s failed bid to acquire Figma for $20 billion puts a big target out there that investors would love to eclipse. But I’d be wary of chasing the stock if it soars at the offering.

Adobe’s bid came during a period of high valuations for software companies. Adobe was willing to pay up for Figma because the deal eliminated a competitor, which is why regulators shot it down, and because of synergies between the companies. Figma won’t benefit from either of those as a stand-alone public company. Moreover, slowing revenue growth and pressure from artificial intelligence have driven down valuations since the Adobe deal.

If the $20 billion price is too high, there’s another less frothy price to consider. After the Adobe deal fell apart, Figma bought back a hefty amount of stock from its employees and investors in a tender offer valuing it at $12.5 billion.

A more realistic valuation for Figma in the offering is about $15 billion, based on comparable companies and taking into account the pressures Figma is facing.

Two software companies that closely resemble Figma are Datadog and Monday.com. All three companies have gross margins over 80%, free cash flow margins of around 30% and boast net revenue retention rates of over 100%, a sign customers are staying and increasing their spending. Datadog and Monday.com are among the fastest-growing publicly traded firms in the software business.

Monday.com trades at 10.4 times next year’s sales and Datadog at 13.9 times, one of the highest multiples among software companies. Assuming Figma grows its sales in 2025 at the same rate it did in 2024, on Datadog’s multiple, it would be worth $15 billion.

None of this analysis may make any difference, though, if investors see Figma as the next CoreWeave or Circle. Venture capital investor Tomasz Tunguz said the success of these two unusual companies, which he calls “a REIT masquerading as an AI company and a crypto stablecoin business,” is a good sign for a traditional fast-growing software company like Figma.

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“If you think about the lack of IPOs and the massive outperformance of Circle and CoreWeave, it tells you that people are chasing growth of new stocks,” Tunguz said.

AI Brings Higher Competition, Costs

The trouble is that such rapid growth might not be sustainable. Like many other software firms founded before ChatGPT, Figma faces a major threat from AI. Keeping its technology relevant while also maintaining profitability will be tough.

The company is banking heavily on two unproven strategies to sustain its rapid expansion. The first is a set of brand-new products and features it announced at its annual conference, Config, in May, many of which are still in beta testing. These include tools such as Figma Draw, a kit of illustration tools, and Figma Sites, a website builder.

It’s too early to tell how Figma’s new products will be received. The company might lose customers to companies with overlapping products like AI-powered app builders Replit and Lovable. Such tools could obviate the need for some of Figma’s design features, which is one likely reason why Figma released its own version, Figma Make, in May. Tunguz says that with an AI coding assistant by their side, software engineers are now capable of being designers.

Figma is also feeling the heat when it comes to serving users who aren’t engineers. There, Adobe could pose a real threat. Adobe had suspended work on its own online collaboration tools while it was in talks with Figma, which “gave Figma a little bit of an opening to expand,” said D.A. Davidson equity analyst Gil Luria. However, he added, “Adobe will not just cede the market to Figma and will continue to invest resources and be more competitive there.”

Luria’s view is supported by survey results released last month by another software analyst, Jackson Ader at KeyBanc Capital Markets. In a poll of more than 400 people who use Adobe Creative Cloud software regularly, 80% said they regularly used its AI tools—a higher proportion than Ader had expected.

There’s also mounting competition from Canva, another design software maker that has long been teasing the idea of going public. Dissatisfied Adobe customers whom Ader surveyed said they preferred Canva over other alternatives, including Figma.

Figma’s second strategy to boost growth is to increase prices, which it started to do in March. While that might help its revenue in the short term, it’s a risk that move could irritate some customers, hurting retention.

Plus, offering AI tools to customers is wildly expensive, partly because Figma has to incur the cost of routing each customer query to an AI model. Figma’s cost of revenue has been growing faster than its top line, and the company acknowledges that its investments in AI will negatively impact its margins.

One big point in Figma’s favor, though, is that it doesn’t have any substantial debt. It could potentially use the $1.5 billion in cash on its balance sheet and its IPO proceeds to buy up promising AI startups (though judging by recent AI funding rounds, doing so likely won’t be cheap).

These challenges aren’t unique to Figma—nor is it uniquely equipped to address them. That’s why Figma is probably not worth $20 billion, even if excited IPO investors are willing to pay that.