DocuSign (DOCU 0.10%) and Adobe (ADBE -0.77%) initially seem like very different companies. DocuSign is the world's largest e-signature company, while Adobe provides industry-standard creativity software like Photoshop, Illustrator, and Premiere Pro as cloud-based services.
However, Adobe also competes against DocuSign with Adobe Sign, Adobe Acrobat, and other business-oriented cloud services. Adobe also integrates those services into its cloud-based sales, marketing, e-commerce, and analytics tools for enterprise customers.
Image source: Getty Images.
DocuSign is a lot smaller than Adobe, but it's growing at a faster rate by capitalizing on the rising demand for e-signatures worldwide. Adobe generates slower but stable growth from its diversified portfolio of cloud services.
DocuSign and Adobe both slumped over the past three months as rising interest rates sparked a sell-off in higher-growth tech stocks. But over the past 12 months, Adobe's stock has still risen 13% as DocuSign's shares plummeted 45%. Let's see why Adobe outperformed DocuSign by such a wide margin, and if that trend will continue throughout the rest of 2022.
Why did DocuSign's stock crash?
The bulk of DocuSign's stock price decline occurred after it posted a mixed third-quarter earnings report last month. Its revenue rose 42% year over year and beat analysts' expectations, but its fourth-quarter guidance for 29%-31% growth missed the consensus forecast for 34% growth.
That forecast implies its revenue will rise 44% in fiscal 2022, which ends this month, compared to its 49% growth in fiscal 2021. That deceleration seems minor, but analysts expect that slowdown to continue with 25% growth in fiscal 2022 as it faces tougher year-over-year comparisons.
CEO Dan Springer also warned of a post-lockdown deceleration as more people physically returned to work. In a statement, Springer said its customers were returning to "more normalized buying patterns" following "six quarters of accelerated growth."
However, DocuSign still expects its adjusted gross margin to expand for the full year, which indicates its dominant market share of about 70% in the e-signature market still gives it plenty of pricing power against challengers like Adobe. It also continues to expand the DocuSign Agreement Cloud -- which bundles together all of its cross-platform e-signature and contract lifecycle management services -- to increase the stickiness 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 comfortably above 100% ever since its IPO nearly four years ago.
Analysts expect DocuSign's adjusted earnings to jump 120% in fiscal 2022 and grow another 8% in fiscal 2023. Those metrics all look healthy, but DocuSign's stock overheated during the growth stock rally last year. Even after being nearly cut in half over the past year, DocuSign's stock still doesn't look cheap at 60 times forward earnings.
Why did Adobe's stock remain stable?
Adobe's revenue growth decelerated to 15% in fiscal 2020, which ended in November of the calendar year, as its enterprise-facing businesses (especially its advertising cloud) were hit by pandemic-related headwinds.
However, Adobe's revenue rose 23% in fiscal 2021 as those headwinds faded. Its Digital Media (Creative Cloud and Document Cloud) and Digital Experience (its analytics, marketing, e-commerce, and e-signature services) businesses both generated strong double-digit sales growth.
Adobe's gross margin also expanded to an impressive 88% for the full year, which indicates the reputation of its software and the stickiness of its cloud-based subscriptions still give it plenty of pricing power.
Adobe expects its revenue and adjusted earnings to grow 13% and 10%, respectively, in fiscal 2022 as the year-over-year comparisons normalize. It expects its Digital Media and Digital Experience revenues to rise about 17% and 19%, respectively, for the full year, and it plans to keep repurchasing shares through the remaining $13.1 billion of its ongoing buyback plan, which lasts through the end of fiscal 2024.
Adobe's stock also got a bit overheated in 2021, but its 20% pullback over the past month has reduced its forward price-to-earnings ratio to 40. It certainly isn't cheap yet, but three factors might justify that slight premium.
First, Adobe is firmly profitable by both generally accepted accounting principles (GAAP) and non-GAAP measures. Rising interest rates will likely pull investors away from companies like DocuSign, which are unprofitable by GAAP measures, and usher them back toward profitable tech giants like Adobe that don't need to borrow more cash.
Second, Adobe's business model is well-diversified and well-insulated from macro headwinds. It isn't pinned to a single secular trend like DocuSign, and inflation won't prevent its subscribers from paying their annual fees.
The winner: Adobe
DocuSign's decelerating growth and high valuation could limit its near-term gains this year as investors rotate toward more conservative investments.
Adobe, however, is more resistant to macroeconomic headwinds and provides a better blend of growth and value. Therefore, it's smarter to stick with Adobe's slower-growth business than to bet on DocuSign -- which might drop even further before it's finally considered undervalued.
