Adobe’s (ADBE) decision to terminate its deal with design platform Figma might have been the preferred choice of investors as it could free up cash for more aggressive share buybacks, UBS said in a note emailed Tuesday.
While Adobe announced in 2022 that it would buy Figma in a cash-and-stock deal valued at $20 billion at the time, the recent increase in Adobe’s shares put the deal price at around $26 billion, analysts Karl Keirstead and Seth Gilbert wrote.
“We believe that most investors preferred that the deal not close,” the analysts said, reiterating a neutral rating and $600 price target on the stock. Shares of Adobe closed up 2.5% on Monday after the companies terminated the deal due to regulatory hurdles in the European Union and UK.
Adobe paid $1 billion in termination fee to Figma. The former has about $10 billion of cash that it can now use for more aggressive stock buybacks, according to the brokerage. “The initial investor attention is focused on the prospect of an accelerated buy-back,” Keirstead and Gilbert wrote.
Over the last three quarters, Adobe has repurchased roughly $1 billion of its shares per quarter, which is down from a peak of $2.4 billion in the quarter ended February 2022, according to Keirstead and Gilbert. If this pace were to double to $2 billion per quarter, repurchases would be accretive to fiscal 2024 earnings per share by about 1%, they said.
“Adobe had signaled that after paying down any term loan associated with the Figma deal, it would resume stock repurchases to reduce its share count,” the analysts said. “Alternatively, Adobe could look to acquire other assets, although we’re hard-pressed to identify an equally attractive target that wouldn’t also trigger regulatory concerns.”
UBS lifted its EPS estimates by about 1% across every fiscal 2024 quarter. In the current quarter, it now sees EPS of $4.43, remaining above the consensus that it put at $4.37. For the full year, the analysts lifted their EPS estimate to $18.09 from $17.94, versus the $17.97 consensus.
While Figma’s recent product launches and blogs “haven’t hinted at any material step into Adobe’s turf,” investors should assess the risk that Figma “now becomes a more formidable rival that (along with Canva) erodes Adobe’s creative opportunity,” the analysts wrote.