Adobe (ADBE  ) shares were down by 20% following the company's announcement that it had acquired online design platform, Figma, for $20 billion in a combination of cash and stock. Another contributing factor was its weaker than expected guidance for the next quarter.

Figma was founded in 2012 and it was the first product to offer cloud-based design software that allowed real-time collaboration between users. It competes with Adobe XD and is among the suite of open-source, free products that could erode Adobe's long-term dominance in many categories. Figma is expected to generate $400 million in annual recurring revenue and raised money at a valuation of $10 billion in 2021.

One reason for the negative reaction in Adobe's stock price is that many consider this an overpay given that Figma is being valued at 50 times its revenue, while most SaaS companies are experiencing a contraction in multiples. The overall price-to-sales ratio of the BVP Nasdaq Emerging Cloud Index has contracted to 9 from 25 at the peak in early 2021.

Adobe will be integrating features from some of its products into Figma's platform to make the software more powerful. And, Adobe is looking to integrate Figma's collaborative capabilities into its products, many of which are legacy products that younger professionals don't use. Currently, Figma co-founder and CEO Dylan Field will continue to lead Figma. He will report to David Wadhwani, the president of Adobe's digital media business.

Fiscal Q3 Earnings

In its fiscal Q3, Adobe reported $3.40 in earnings per share which topped analysts' estimates of $3.33 per share. Revenue came in line with expectations at $4.43 billion. Both figures were up 13% and 11%, respectively.

However, shares were weak on the company's underwhelming guidance as the company forecasted $4.52 billion in revenue vs expectations of $4.6 billion. Earnings came in slightly above expectations at $4.60 per share vs $4.57 per share.

Overall, Adobe shares are now down 45% YTD and are off by 58% from the all-time high in early 2021. Valuations have also continued to improve as the company continues to grow earnings at a double-digit pace with its forward P/E reaching 19.5.

However, the company is swimming against the tide by acquiring Figmat at a very lofty valuation of $20 billion. This amounts to 1/7 of its current market cap and is more about protecting the business' moat rather than growing earnings.