One would be forgiven for overlooking e-signatures as a high growth area and failing to recognize the potential of an investment in this rapidly expanding space. The shift to digital has accelerated the use of e-signatures, but which is a better investment?
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DocuSign: The Bull and Bear Case
DocuSign (NASDAQ: DOCU) is the leader in the e-signature market, having gone public in 2018, and its stock is up over 200% year-to-date (YTD). Its core business revolves around e-signatures, unlike its biggest rival, Adobe (NASDAQ: ADBE).
DocuSign boasts an impressive market share of roughly 70%. It has millions of users worldwide and 749,000 paying customers as of fiscal Q2, 2021 an increase of 88,000 on the prior quarter. To put this into context, DocuSign added more customers in the first half of this year than in the whole of 2019. It also has 18 of the top 20 global pharmaceutical companies and 10 of the top 15 global financial companies.
Total revenue increased 45% to $342.2 million year-over-year (YoY) and international revenue grew 65%, making up just under one-fifth of revenue. Subscription revenue made up roughly 95% of revenue in the quarter. DocuSign has seen a sustained rise in demand since Q1 of this year that management expects to continue.
In 2019, DocuSign moved outside its flagship product with DocuSign Agreement Cloud, which allows its users to take control of the entire agreement process, and significantly expands its total addressable market (TAM) to an estimated $25 billion. DocuSign is continuing to invest in expansion after it acquired startup Liveoak Technologies, which allows parties to sign agreements remotely.
DocuSign is by no means the only player in the space. Larger competitors with deep pockets and newer competitors such as HelloSign could eat up market share. First mover advantage will not be sustainable as a competitive advantage forever and DocuSign needs to continue establishing its place as the leader in the space.
DocuSign is also trading at a rich valuation at 37 times price to sales where traditionally a valuation of 1 to 2 is considered good but is rarely ever found with growth stocks. Traditional metrics may not be the best way to value a high flying growth stock. However, it demonstrates the rich valuation.
Adobe: The Bull and Bear Case
Adobe is a familiar name that has beaten the market over the last 20 years. The company pivoted significantly in 2013 when it adopted a subscription-based model rather than discs for its software offerings.
Adobe has consistently reported record revenue and in fiscal Q3 of 2020 revenue was a record $3.23 billion a 14% increase YoY. Subscriptions accounted for roughly 92% of overall revenue. It reports in two segments: Digital Media and Digital Experience, with a range of products under each category.
Adobe Document Cloud is the biggest threat to DocuSign with a suite of tools to fill and sign forms electronically. It is a small part of the overall company, accounting for $375 million in revenue, and is the fastest-growing segment with 22% growth YoY. AdobeSign has a much smaller market share than DocuSign currently, at approximately 5%.
Adobe also has a strong balance sheet with $5.26 billion in cash and short-term investments and debt of $4.1 billion, which is spread over the next decade. This large cash reserve will enable Adobe to innovate and could be used to fuel the growth in its Document Cloud business which could eat into DocuSign’s market share.
Adobe has a number of larger competitors such as Microsoft, SAP, and Salesforce which pose a threat. However, Adobe in the past has navigated challenges regarding its business model and competitors and should be able to do so in the future. Its diverse revenue also allows for any hiccups.
The company is also not cheap trading at a price to sales of roughly 19 compared to single digits in March and price to earnings of 63. The company has never been “cheap” by these metrics, but investors should take note.
Which is the better e-signature play?
These two companies could be a great addition to your portfolio. For the more risk-averse investor, the more mature and stable Adobe may be the better option, but for the growth investor who can stomach volatility and wants more upside potential, DocuSign could be the better choice.
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