Since peaking in November, the tech-heavy Nasdaq Composite has dropped nearly 15%, putting the index in correction territory. And many individual stocks have fallen much further. For instance, shares of DocuSign (DOCU 1.02%) and Zoom Video Communications (ZM 0.05%) have dropped 63% and 78%, respectively, from their highs, as Wall Street continues to weigh the impact of high inflation and potential interest rate hikes on corporate profitability.
Many investors have also mistakenly categorized DocuSign and Zoom as "pandemic stocks," citing slowing revenue growth as cause for alarm. But nothing could be further from the truth. Both businesses play an important role in digital transformation, and their services should only become more valuable in the years ahead. Better yet, both stocks look relatively cheap right now.
Here's what you should know.
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1. DocuSign
Agreements are an essential part of any business. Organizations form agreements with customers, employees, and partners, but traditional paper-based processes -- such as printing, signing, and taking action on a physical document -- are slow, costly, and prone to errors. With its Agreement Cloud, DocuSign aims to accelerate and simplify workflow by digitizing and automating the agreement process. Its platform spans over a dozen applications, and it integrates with over 350 other technologies.
At its core is DocuSign eSignature, a product that allows documents to be signed in a digital, secure, and legally valid manner, on virtually any device. But the company's portfolio also includes tools for automatic contract generation, AI-powered analytics and risk scoring, and payment collection. Collectively, those tools help clients work more quickly and efficiently.
Founded in 2003, DocuSign is a pioneer in the e-signature industry, and the company has parlayed its first-mover status into a robust competitive edge. DocuSign ranks as the No. 1 e-signature tool, holding over 70% market share, and its platform boasts a net promoter score (NPS) of 72. For context, the NPS is designed to measure the customer experience, and 50 is an impressive score, but an NPS of 70 (or higher) is considered world class.
Not surprisingly, DocuSign's strong competitive position and excellent rapport with customers have fueled impressive growth. Over the past year, the company's customer base expanded 34% to 1.1 million; revenue soared 51% to $2 billion; and free cash flow skyrocketed 125% to $418.7 million. More importantly, management puts its addressable market at $50 billion, meaning DocuSign still has plenty of room to grow. And with the stock trading at 11.4 times sales -- significantly cheaper than its three-year average of 22 times sales -- now looks like a good time to buy a few shares.
2. Zoom Video Communications
Zoom became a household name during the pandemic. Its core product, videoconferencing app Zoom Meetings, helped socially distanced friends and families stay in touch, while allowing students and employees to learn and work remotely. However, Zoom is more than a videoconferencing application; it's a communications company, and its platform also includes a cloud-based phone system (Zoom Phone) and a software-based collaboration suite for hybrid workforces (Zoom Rooms).
While some employees have already returned to the office, remote work is likely here to stay. In fact, research firm Gartner believes that 48% of employees will work remotely at least part time in a post-COVID world, up from 30% prior to the pandemic. And Gartner says that by 2024 just 25% of enterprise meetings will take place in person, down from 60% in 2019. Both of those trends are good news for Zoom and its shareholders.
Better yet, Zoom is actually becoming more popular. In the videoconferencing space, the company captured 49% market share in 2021, up from 26% in 2020. Even more impressive, Zoom is actually the fifth most popular enterprise application of any kind, according to Okta's 2022 Business at Work report.
In the most recent quarter, Zoom hit 512,100 customers, up 18%. And the company has kept its expansion rate above 130% for the last 14 quarters, meaning the average customer consistently spends 30% more. Fueled by that stickiness, revenue soared 100% to $3.9 billion over the past year, and free cash flow rose 59% to $1.7 billion. More importantly, management puts its market opportunity at $91 billion by 2025, leaving plenty of room for future growth. And with the stock trading at 9.7 times sales -- near its cheapest valuation since going public in 2019 -- now looks like a good time to invest in this beaten-down tech company.
