Figma's Sell-Off: When a Beat Meets a Bigger Expectation Gap

The sell-off in Figma shares on Friday wasn't just a reaction to one piece of news. It was the market digesting a perfect storm where specific fears about its future collided with a broad sector-wide risk-off mood. The result was a sharp reset of expectations, as the stock's 74% drop from its IPO peak shows.

The immediate catalyst was a wave of selling across the software sector. The iShares Expanded Tech-Software Sector ETF (IGV) is down 24% year-to-date, a rout that has pressured high-priced SaaS names. This broader pullback was fueled by hotter-than-expected producer price data and growing concerns over AI disruption. The fear is that tools like Anthropic's 'Cowork' could shift workflows, pressuring valuations for software companies built on collaboration and design.

Against this backdrop, Figma's recent growth beat was overshadowed. The company did post a solid fourth-quarter revenue of $303.8 million, a 40% jump from the prior year. That acceleration, along with a record net new revenue and a 136% net dollar retention rate, showed the business is scaling. Yet, the market's focus had already shifted. The expectation gap had widened, with fears of competitive disruption from free AI tools like Google Gemini now outweighing the positive earnings print.

This dynamic played out in the stock's extreme volatility. Figma shares are now among the Russell 1000's worst performers for the day, trading at around $29.29. The stock's path since its late-2025 peak near $122 has been a steady downtrend, with moving averages rolling over. The 74% decline from its IPO highs underscores the depth of the expectation reset. The market is no longer pricing in a simple growth story; it's pricing in a battle for its moat.

AI Disruption: The New Reality vs. Priced-In Fear

The market's reaction to Figma is less about today's earnings and more about a fundamental question: Is the software business model itself under siege? The specific threats are now concrete, moving from theoretical to immediate. Anthropic's new AI tools, built for its Claude "Cowork" agent, are explicitly designed to handle complex professional workflows that software providers like Figma sell as core products. This isn't a distant future scenario; it's a direct challenge to the value proposition of collaboration and design platforms. At the same time, Google is applying pressure from a different angle. Its free Gemini offering competes directly with paid creative suites, stoking fears that it could shift AI-driven design workflows away from Figma's browser-based platform. This dual-pronged attack-advanced AI agents taking over complex tasks and free tools capturing simpler ones-threatens both Figma's pricing power and its growth trajectory.

The market's fear is now fully priced in. The S&P 500 Software & Services Index is down about 20% so far this year, and the sell-off has spread from U.S. to Asian IT firms. This isn't a minor correction; it's a sector-wide reset where the expectation gap has widened dramatically. The stock's 74% drop from its IPO peak shows investors are pricing in a prolonged period of competitive pressure and valuation compression.

Yet, the debate among tech leaders is starkly divided. Nvidia's Jensen Huang has dismissed the fears as "the most illogical thing in the world," arguing AI will use and enhance existing software rather than replace it. Other executives echo this, calling the current market jitters "micro-hysteria." The counter-argument is that AI will indeed "eat" software, cannibalizing SaaS revenue and limiting how much companies can charge. Analysts are split, with some warning of an "Armageddon scenario" that is far from reality, while others see lasting pressure on profits and multiples.

The bottom line is that the market is betting on the latter view. Figma's strong growth and AI roadmap are being overshadowed by this competitive uncertainty. The stock's path will now depend on whether the company can prove its platform is a necessary bridge for AI workflows, not a target for them. For now, the expectation gap is wide, and the market is demanding a much clearer answer.

Valuation & Catalysts: The Analyst Consensus Reset

The market's verdict on Figma's future is now clear in the analyst ranks. The average one-year price target has been revised down to $42.00 per share, a 12.9% cut from early February. This consensus shift reflects the broader expectation gap, where fears of AI disruption have outweighed the company's solid growth metrics. The range of targets now stretches from a low of $30.30 to a high of $63.00, highlighting a deep divide in how analysts see the path ahead.

Against this backdrop of lowered expectations, one metric remains a critical signal for any guidance shift: product stickiness. Figma's 136% net revenue retention rate for large customers is a powerful indicator of its moat. That number, accelerating from 129% the prior quarter, shows existing clients are not just staying but spending more. This is the kind of organic growth engine that can support a "beat and raise" narrative if management can demonstrate it will continue to fuel the top line through the competitive turbulence.

The key catalysts to watch are the company's upcoming guidance and its planned move to an AI credit pricing model. Figma has already forecast 2026 revenue between $1.366 billion and $1.374 billion, implying about 30% growth at the midpoint. For Q1, it is looking for revenue of between $315 million and $317 million, a 38% year-over-year jump. Any guidance that meets or exceeds these numbers could be a positive surprise. More importantly, the company's model will shift in March to charging for both seat and AI credits. This change could signal a direct monetization of its AI adoption, which is already high-about 75% of its largest customers are using AI credits weekly. If this pricing model drives faster revenue growth, it could help reset the valuation story.

On a broader basis, Figma trades at a forward price-to-sales ratio of around 8.5x. That multiple is a fraction of what it commanded at its peak, reflecting the severe expectation reset. The debate now is whether this price is a buy. The bullish case, supported by the put/call ratio of 0.55 and increased institutional ownership, hinges on the company proving its platform is essential for AI workflows, not a target. The bearish case is that the AI disruption fears are fully priced in, and the stock's path will be dictated by whether the company can execute its AI monetization and guidance without a reset. For now, the market is waiting for concrete evidence that the expectation gap is narrowing.