Three companies now occupy the design tools market and they are separated by a single variable: how much of the design artifact is a proprietary file that only the vendor can open.
Adobe sits at the maximum. Photoshop, Illustrator and InDesign formats have been the industry’s storage layer for three decades, and the moat was never the software — it was that every agency, every printer, every archive and every freelancer on earth could open the file. Figma sits in the middle. It moved the canvas into the browser and replaced the desktop file with a multiplayer document, but it is still a proprietary document, and the organization’s design system of record still lives inside Figma’s walls. Paper, which announced a $34 million Series A on Wednesday led by Accel and ICONIQ, sits at zero. It renders with HTML and CSS. There is no file. That is the entire product thesis.
The market has been paying almost exactly inversely to that ordering, and that inversion is worth staring at. Adobe, with the deepest format lock-in, the highest gross margins in the category at roughly 89%, and an operating margin near 39%, trades at somewhere between nine and eleven times its own fiscal 2026 non-GAAP guidance of $24.35 to $24.45 per share. That is a melting-ice-cube multiple applied to a business that grew revenue 11% to a record $6.62 billion last quarter. Figma, with partial lock-in and 46% revenue growth, trades around eight times estimated 2027 enterprise value to sales, a premium to the roughly 5.9 times peer average but roughly half where it sat six months ago. Paper, with no lock-in by construction, just raised at a venture multiple on an undisclosed revenue base.
The more the file protects you, the less the market is willing to pay. That is not how moats are supposed to be priced, and understanding why is the whole analysis.
Start with what the incumbents actually reported, because neither set of numbers shows disruption. Adobe’s fiscal second quarter, reported June 11, delivered record revenue of $6.62 billion, up 11%, with non-GAAP EPS of $5.96 against $5.81 expected, remaining performance obligations up 13.1%, and AI-first ARR tripling year over year to more than $500 million. GenStudio ARR grew over 25%. Management raised full-year guidance to $26.5–$26.6 billion of revenue and projected total ending ARR growth of 10.2%. Normalized EPS has increased every year without exception from $12.48 in 2021 to $20.94 in 2025. Figma’s first quarter grew revenue 46% to $333.4 million, beat on EPS, posted net dollar retention of 139% — its best reading in more than two years — and management raised the full-year revenue guide by $55 million to roughly $1.425 billion. Seventy-five percent of enterprise customers who blew through their AI credit limits bought more.
Against that, Adobe has fallen roughly 48% over twelve months, from nearly $376 in January to below $190 at the late-June trough before recovering into the low $200s. Figma has fallen roughly 44% in the first half alone, with more than 20% of that arriving in a single month on no operating datapoint whatsoever, and now trades below $22 against a post-IPO peak above $115.
So the market has destroyed an enormous amount of capitalization across both public incumbents while the competitor set responsible for the fear consists of a company that just raised thirty-four million dollars and reports its traction as a multiple rather than a number.
The obvious conclusion — that this is a mispricing — is too easy, and the reason it is too easy is the most useful thing in this entire situation. Every metric the incumbents report is structurally incapable of detecting the disruption in question.
Net dollar retention measures what customers you already had are spending now. It is a leak detector on the installed base. It is completely blind to companies that never become customers. If a startup founded in 2026 hires two designers who have only ever worked in agent-native tooling and never opens a Figma account, Figma’s net dollar retention stays at 139% and its revenue keeps compounding, and the erosion is entirely invisible until the cohort that never adopted becomes large enough to matter — which, for enterprise software, is five to eight years. The same logic applies to Adobe’s ARR growth and its remaining performance obligations. Both measure the past cohort’s behavior with high fidelity. Neither measures formation.
Nobody reports new-company adoption share. There is no line item for it. Which means the disruption thesis is unfalsifiable with published metrics, and unfalsifiable theses compress multiples indefinitely, because no earnings report can end the argument. That is the mechanical explanation for why Adobe can beat, raise, triple AI ARR, announce a $25 billion buyback running through April 2030, and still trade at nine times earnings — and why Figma can print a two-year-high retention figure and fall 20% the following month.
Here is the part that makes the argument sharper rather than merely contrarian: Adobe’s own capital allocation confirms the risk its metrics cannot show. Management is deferring previously planned Creative Cloud line optimizations in the second half to push more aggressively into freemium acquisition, explicitly accepting weaker near-term ARR in exchange for new user volume. Chasing free users at the cost of monetizing existing ones is what a company does when it is worried about top-of-funnel — about formation, about the cohort that has not chosen yet. Adobe is spending real ARR to defend the exact flank that no reported metric covers. That is a more credible signal about the competitive threat than anything in the press release Paper issued.
It is doing so, notably, with neither a permanent CEO nor a permanent CFO. Shantanu Narayen’s succession search is ongoing and CFO Dan Durn departed effective June 15. Adobe is executing a business model pivot, an AI repositioning, and a bolt-on acquisition strategy — $1.9 billion for Semrush, Topaz Labs agreed in late June — through the most contested moment in the category’s history with an interim finance chief. That is a genuine, company-specific, non-narrative risk, and it is the reason Morgan Stanley’s Adam Wood cut to Underweight with a $240 target from $365 while HSBC upgraded to Buy and CLSA initiated Outperform at $300. Consensus sits at Hold with targets clustered between roughly $264 and $326, a low of $190 and a high near $380.
On competitive position, the honest ranking is not the one the stock prices imply. Adobe’s moat is the most durable of the three and also the most brittle in a specific way: format ubiquity survives everything except a world where the artifact stops being a file, which is precisely what both Figma and Paper are building toward. Figma’s moat is the design system of record plus multiplayer network effects, genuinely strong inside an organization, genuinely weak against a new organization that never adopts. Paper has no moat at all in the switching-cost sense, and this is not a criticism the funding announcement can answer — if the proposition is that designs are just HTML and CSS that coding agents can read, then Vercel can ship it, Adobe can ship it, Figma can ship it from Dev Mode and its Model Context Protocol server, and adjacent AI-native tooling already operates in the same territory. Paper is competing on taste, speed and workflow quality, which are real assets that decay fastest under funded imitation. Its customer list — Ramp, Lovable, Vercel, PostHog, Quartr, Y Combinator — is the strongest possible leading indicator and the weakest possible evidence of enterprise penetration.
Which sets up the trade with unusual clarity. If disruption is real, the correct expression is not shorting Figma, which grows 46% and retains at 139% and will keep printing good quarters for years; it is shorting Adobe, where the multiple is already low but the terminal business is the file format and the leadership bench is empty. If disruption is a narrative, the correct expression is Adobe, at nine to eleven times a business compounding EPS every single year with an 89% gross margin and a buyback running to 2030 — the cheapest large-cap software franchise on the board. Figma is the worst-positioned of the two for either thesis: it carries growth-stock volatility with incumbent-scale disruption risk, and it is the one whose moat is most directly targeted by what Paper actually built.
For Figma, base case $20 to $28 into the August 14 print, bull case $35 to $40 if retention holds above 130% alongside re-accelerating six-figure customer counts, bear case $14 to $17 on a retest of the 52-week low, which would be cohort derating in unprofitable software rather than a company-specific break. For Adobe, base case $200 to $265, bull case $300 to $330 if a permanent CEO lands and AI-first ARR compounds off the $500 million base, bear case $170 to $190 if the freemium pivot suppresses ARR growth below 8% while the leadership vacuum persists — again a derating rather than an operational break, since the earnings are not in question.
Watch the number nobody publishes. Neither Adobe nor Figma will ever report what share of companies founded this year chose them, and that is the only figure that settles this. The nearest available proxy is Adobe’s freemium user acquisition disclosure in the fiscal third quarter, guided to revenue of $6.67 to $6.72 billion. If Adobe is willing to keep sacrificing measured ARR for unmeasured funnel, it is telling you what it sees in a number it will not print.
