The pandemic has accelerated the transition to performing routine tasks digitally. For example, 46% more people use online grocery delivery now than before the pandemic began, according to Supermarket News. Another area impacted is digital document signatures. Spending hours in an office signing mortgage papers is a thing of the past; now it's all done online with a few clicks. Leading the way are two companies: DocuSign (DOCU 0.30%) and Adobe (ADBE 1.33%). Both have significant interest in the e-signature movement, but which stock is the better buy for investors?

DocuSign: The pure-play

With more than 1 million paying customers worldwide, DocuSign has a strong e-signature market foothold. It also has other services like contract lifecycle management, document generation, and contract analytics. Through its agreement cloud, DocuSign streamlines and manages many time-consuming tasks when it comes to binding contracts. Additionally, DocuSign's process has saved 38 billion sheets of paper and 4 million trees, making it a potential environmental, social, and governance (ESG) investment.

A person holds a pen above the signature section of a paper.

Image source: Getty Images.

DocuSign derived 96% of revenue from subscriptions in the second quarter, which ended July 31. Subscription revenue grew 52% in the quarter. From Jan. 31, 2020, to Q2 it has nearly doubled its enterprise and commercial customers to 148,000. Its customers are also expanding their spending with DocuSign, captured by its 124% net dollar retention metric.

While Adobe is a mature company generating consistent profits, DocuSign does not. DocuSign lost $0.04 per share last quarter but made a non-GAAP (adjusted) $0.44 when stock-based compensation and other items are added back. DocuSign's share count is also rising, diluting shareholders. DocuSign is a much riskier investment than Adobe, as it has not proven it can operate without compensating its employees with stock.

Adobe: Not a one-trick pony

Adobe's document cloud is just one part of its sprawling business; it only made up 12.5% of third-quarter revenue. The segment itself is categorized under Adobe's digital media umbrella, which includes products like Photoshop, Acrobat, and Premiere Pro. Businesses can also manage and analyze their advertising campaigns using Adobe's digital experience component. With Adobe, e-signature is just a chapter within a larger book.

Overall, Adobe generated $3.9 billion in Q3 compared with DocuSign's $512 million. More specifically, its document cloud segment brought in $493 million, growing 31% with annualized recurring revenue (ARR) of $1.8 billion. DocuSign's numbers are similar, except it is growing quicker.

Adobe has remarkable margins; it converted 31% of its Q3 revenue to net income. It also has an active stock repurchase plan reducing the outstanding share count. Through its growth, Adobe is pushing closer to becoming a much larger company. Adobe is a more conservative stock pick than DocuSign as investors know they are getting an established, but growing, company.

DocuSign or Adobe?

The digital signature market is expected to grow substantially over the next decade. One estimate pegs its future value at $25 billion by 2030, representing 29% compound annual growth. With an expanding opportunity, both DocuSign and Adobe are positioned to capture a significant chunk of the market. Smaller players exist throughout the space, but none are near DocuSign or Adobe's reach.

The market is expecting strong, sustained growth from DocuSign and relays that by giving it an expensive 25 price-to-sales ratio. One earnings misstep for DocuSign will result in the stock getting crushed as the market reevaluates its future prospects. Adobe trades at a 55 price-to-earnings ratio, not cheap either for an established, profitable company. Both stocks are highly valued and must continue executing to maintain current levels.

Over the last three years, both stocks have performed well against the market. Particularly, the Invesco QQQ Trust (QQQ 1.50%) which is an exchange-traded fund based on 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq. 

DOCU Chart

DOCU data by YCharts

If each company continues to grow and execute, both will outperform the market for the next three years. DocuSign gives greater upside, as it is a pure-play in a market growing quickly. Should DocuSign grow at the projected 30% market pace, it would generate revenue of more than $15 billion by 2030. At its current valuation, the company would be valued at around $400 billion resulting in a sevenfold return from today's current market cap. 

Adobe also has significant growth prospects, but will not provide as spectacular stock returns as DocuSign due to its size. However, Adobe's ancillary businesses are also growing, giving investors a more diversified approach.

Overall, both stocks present fantastic investing opportunities. DocuSign is the better buy if investors are bullish on the e-signature transition. Should the trend fail to take hold, Adobe will be better suited as it does not have all its bets in the space. Adobe also represents a more conservative way to invest, as it is already turning a profit and rewarding shareholders through buybacks. With the convenience and positive environmental effects of signing documents digitally, it would be surprising if contracts revert back to pencil and paper. Both DocuSign and Adobe are positioned well to usher in the new age of e-signature and document management.