Shares of cloud-based agreement-service provider, DocuSign (DOCU +1.23%) briefly surged in response to a quarterly report that, in some ways, was better than expected. Unfortunately, the stock fell once investors had more time to digest management's forward outlook. Now, DocuSign shares are around 82% below the all-time high they set in 2021.
The latest quarter wasn't the first time that Docusign beat analyst expectations. Could a big rally be around the corner for this beaten-down growth stock? Let's take a closer look to see if it deserves a place in your portfolio right now.
NASDAQ: DOCU
Key Data Points
An encouraging quarter
Wall Street predicted the company would earn an adjusted $0.56 per share during the fiscal first quarter that ended April 30. DocuSign blew past expectations by reporting adjusted earnings that surged 89% year over year to $0.72 per share.
DocuSign also raised its forward outlook for fiscal 2024. Now, management expects fiscal second-quarter revenue to land in a range between $675 million and $679 million. That's significantly more than the company projected a few months ago and more than Wall Street analysts were projecting.
According to generally accepted accounting principles (GAAP), the company broke even in Q1 compared to a net loss of $0.14 per share in the previous-year period.
Reason to buy DocuSign stock now
DocuSign is a growth stock, but investors who buy at recent prices can realize gains even if the size of its business increases at a modest pace. Right now, the stock is trading at a very reasonable multiple of just 23.7 times forward-looking earnings expectations.
DocuSign's recent market valuation seems like it hasn't incorporated the company's recent growth rate and the size of its addressable market. If the company's predictions regarding the rise of remote and hybrid work are correct, its growth rate in the years ahead will be anything but modest. Citing think tank research from Economist Impact, the company expects the anywhere economy to add $19.4 trillion in cumulative GDP from 2022 through 2030 to 10 of the world's largest economies.
Remote and hybrid work arrangements already rely heavily on cloud-based agreement services. If DocuSign remains a leader in this space through 2030, investors who buy the stock now could realize some eye-popping gains.
Reason to remain cautious
DocuSign isn't the only company offering cloud-based agreement services. Enterprise customers have plenty of options, including Adobe's (ADBE 7.53%) Document Cloud. Adobe has an obvious leg up because nearly all documents requiring signatures exist in the portable document format (PDF) that Adobe Acrobat introduced three decades ago.
NASDAQ: ADBE
Key Data Points
Adobe doesn't share many details regarding its agreement-related service, Acrobat Sign, but it's probably growing faster than DocuSign these days. During Adobe's fiscal Q1 ended March 3, Document Cloud revenue rose 13% year over year.
During DocuSign's fiscal 2024, which ends next January, management expects billings to grow by just 3% compared to fiscal 2023. With Adobe breathing down its neck, DocuSign's seemingly low valuation isn't so low after all.
Just buy both
The long-running popularity of Acrobat and its relationship to any agreement service is a strong advantage for Adobe. That said, it might be an advantage that DocuSign can overcome.
In Q1 alone, DocuSign advanced interoperability with electronic health records in a way that could drive a lot more business from the healthcare sector. It also released a new Web Forms service that quickly generates dynamic, ready-for-signature agreements in response to customer inputs.
Rather than try to guess whether DocuSign or Adobe is likely to come out ahead over the long run, it's probably best to just buy some shares of both stocks and hold on to them for at least five years.
