Question marks over valuation as Canva makes AI pivot

Canva could further push back its IPO as the design software company faces pressure on its valuation amid efforts to establish a profitable business model around artificial intelligence.

Canva's internal valuation has fluctuated significantly in recent years, down from US$40 billion to $31 billion today.

Now, the company's shift towards AI could create a new challenge as it prepares for a potential listing.

Canva has increasingly incorporated generative AI into its platform as competition intensifies from companies including Adobe, Figma and ChatGPT.

While artificial intelligence features could provide new avenues for growth and help it differentiate its products, the cost of running those features could weigh on margins, according to Gary Tian, Professor of Finance at Macquarie University.

"Canva reportedly expects its revenue growth rate to slow from 30 per cent to a more conservative 20 per cent, reflecting the high cost of delivering AI features," he said.

Even at 20 per cent the company's growth should remain strong, but the combination of slower growth and higher costs could make it more difficult to justify a premium valuation when it eventually approaches its public listing.

"Slower growth and higher costs make a premium valuation harder to defend," Tian said.

Canva has previously indicated plans to pursue an IPO, with 2027 identified as a potential timeframe to go public. That target now appears less clear, with a short-term listing now appearing increasingly unlikely.

It previously had little financial pressure to raise capital from public markets because it had been profitable for years.

That gives the company greater flexibility over when it chooses to list, allowing it to wait for more favourable market conditions and greater certainty around its AI-driven business model.

"It's a profitable company," Tian said, "so there is no urgent need to go public to raise additional capital."

Broader weakness and volatility among software companies was another factor that could discourage Canva from moving ahead with an IPO.

The technology sector has been undergoing a significant repricing as investors assess the impact of generative AI on established software businesses, including the potential for AI to disrupt existing products while simultaneously increasing infrastructure and operating costs.

This challenge is particularly relevant for Canva because its business is evolving beyond its traditional software model.

Its pivot from being a pure software company to becoming an AI-enabled service could create uncertainty over how investors assess its future growth and profitability.

Canva will therefore need to demonstrate that the additional costs can ultimately generate sufficient revenue to support its margins and justify its valuation.

The company also faces growing competition as AI capabilities become embedded across the broader creative software market.

Adobe and Figma are developing their own AI-powered tools, while ChatGPT and other generative AI platforms increasingly offer capabilities that overlap with Canva's traditional design functionality.

Canva still retains competitive advantages, however, particularly through its large distribution base and ability to make its tools accessible to a broad array of customers, not just the tech savvy and those with previous design experience.

Tian posited that Canva could differentiate itself by allowing customers to use AI while also maintaining greater control and editability over the resulting content.

Optimism for Canva's future remains

While an IPO in the coming year remains possible, management could instead keep its power dry depending on market conditions, its financial performance and the progress of its AI strategy.

Despite uncertainty surrounding its pivot to AI and adjusted timeline for a potential float, there are still reasons to be bullish on Canva's prospects and its market position among other Australian technology companies.

Tian noted that Canva stood out from many Australian businesses that had expanded overseas, particularly because of its international growth, organisational strength and leadership.

"I remain positive about the Canva's prospects as an Australian-founded global technology company."

The company's next phase will nevertheless present a different challenge from its initial growth and position in the market.

Having built its business around software, Canva's next hurdle to jump will be proving that incorporating AI capabilities can accelerate its growth without undermining profitability.

For prospective investors, that equation could be just as important as its headline revenue growth when the company is eventually floated on public markets.

"The outcome will depend on broader market conditions and on whether Canva can manage the transition to AI smoothly while translating strong demand into profitable growth," Tian said.