DocuSign (NASDAQ: DOCU) And Adobe (NASDAQ: ADBE) At first they look very different companies. DocuSign is the world’s largest electronic signature company, while Adobe provides industry-standard creative software such as Photoshop, Illustrator and Premiere Pro as cloud-based services.
However, Adobe also competes with DocuSign with Adobe Sign, Adobe Acrobat and other business-oriented cloud services. Adobe is also integrating these services into cloud-based sales, marketing, e-commerce, and analytics tools for enterprise customers.
DocuSign is much smaller than Adobe, but is growing at a faster rate by taking advantage of the growing demand for electronic signatures worldwide. Adobe is experiencing slower but steady growth from its variety of cloud services.
Both DocuSign and Adobe have fallen over the past three months as higher interest rates lead to sell-offs in high-growth technology stocks. But over the past 12 months, Adobe stock is still up 13% as DocuSign shares are down 45%. Let’s see why Adobe outperforms DocuSign by such a wide margin, and whether this trend will continue throughout the remainder of 2022.
Why did DocuSign stock crash?
The bulk of DocuSign’s stock price drop occurred after it published a mixed report on third-quarter earnings last month. Its revenue rose 42% year over year and beat analysts’ expectations, but its fourth-quarter guidance of 29%-31% growth wasn’t projected for 34% growth.
These forecasts say its revenue will rise 44% in fiscal year 2022, which ends this month, compared to its 49% growth in fiscal year 2021. This slowdown appears to be slight, but analysts expect that slowdown to continue with 25% growth in fiscal year 2022 It also faces tougher year-on-year comparisons.
Dan Springer, chief executive, also warned of a post-lockdown slowdown as more people return to work physically. Springer said in a statement that its customers are returning to “more normal buying patterns” after “six quarters of exponential growth.”
However, DocuSign still expects its adjusted gross margin to expand for the full year, indicating that its dominant market share of around 70% in the electronic signature market still gives it significant pricing power against competitors like Adobe. It also continues to expand DocuSign Agreement Cloud Cloud – which together brings together all cross-platform electronic signature services and contract lifecycle management – to increase the stability of its ecosystem.
DocuSign served 1.11 million customers at the end of the third quarter, up 34% from a year ago, and its net retention rate has remained above 100% since its IPO nearly four years ago.
Analysts expect DocuSign’s adjusted earnings to jump 120% in FY 2022 and grow another 8% in FY 2023. All of these metrics sound healthy, but DocuSign’s stock has been overheated during last year’s growth stock rally. Even after being roughly halved over the past year, DocuSign stock still doesn’t look cheap at 60 times forward earnings.
Why did Adobe stock stay flat?
Adobe’s revenue growth slowed to 15% in fiscal 2020, which ended in November of the calendar year, as its enterprise-facing business (particularly its ad cloud) took an adverse hit linked to the pandemic.
However, Adobe’s revenue was up 23% in fiscal 2021 as those headwinds faded. The Digital Media (Creative Cloud and Document Cloud) and Digital Experience (Analytics, Marketing, E-Commerce, and Electronic Signature services) businesses delivered strong sales growth.
Adobe’s gross margin has also expanded to a staggering 88% for the full year, indicating the reputation of its software and the stability of its cloud-based subscriptions that continue to give it significant pricing power.
Adobe expects its revenue and adjusted earnings to grow 13% and 10%, respectively, in fiscal year 2022 as annual comparisons normalize. It expects digital media and digital experience revenue to rise approximately 17% and 19%, respectively, for the full year, and plans to continue to buy back stock with the remaining $13.1 billion from its ongoing repurchase plan, which runs through the end of the fiscal year. 2024.
Adobe stock has also warmed up a bit in 2021, but its 20% slump over the past month has reduced the forward P/E ratio to 40. It certainly isn’t cheap yet, but three factors might justify this slight premium.
First, Adobe generates consistent revenue through generally accepted accounting principles (GAAP) and GAAP standards. Higher interest rates are likely to lure investors away from companies like DocuSign, which are considered unprofitable by GAAP standards, and return them to lucrative tech giants like Adobe who don’t need to borrow more cash.
Second, Adobe’s business model is well diversified and well insulated from overall headwinds. It’s not tied to a single secular trend like DocuSign, and inflation won’t stop its subscribers from paying their annual fee.
DocuSign’s sluggish growth and higher valuation could limit its near-term gains this year as investors turn to more conservative investments.
However, Adobe is more resistant to macroeconomic headwinds and offers a better mix of growth and value. Therefore, it’s better to stick with Adobe’s slower-growing business than to bet on DocuSign – which may drop further before it is finally considered undervalued.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.