Pitting two companies against each other to compare which could be a better investment can be an informative endeavor, no matter which ends up being the winner. The side-by-side evaluation can highlight areas where one business is dominant and offer up a clear conclusion about which one to invest in.
But that did not necessarily occur when the discussion came to DocuSign (DOCU -0.64%) and Netflix (NFLX -0.66%) . In this particular comparison, both companies make a compelling case for investment. Let's take a closer look and see if one of these growth stocks has an edge in a comparison of what are really two winners.
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Netflix is the pioneer of streaming content
Netflix is the undisputed leader in the streaming content industry. This giant has amassed 222 million subscribers as of Dec. 31. That was 8.9% higher than the total it had at the same time the prior year. Impressively, Netflix has retained and even added to the outsized subscriber totals it attained during the more acute phases of the pandemic.
The massive size of Netflix gives it a competitive advantage. Netflix generated $29.7 billion in revenue in its fiscal year ended Dec. 31 and spent $17 billion on content. The more Netflix generates in revenue, the more it can spend on content. Of course, content is the reason consumers subscribe to a streaming service. Consumers will jump ship for competitors without a steady stream of hit titles to keep them coming back.
In addition to competitive advantage, the company's scale delivers growing profitability. Netflix has expanded revenue at a compounded annual rate of 24.9% in the last decade. And as Netflix has grown, so has its operating profit margin. From 2016 to 2021, this margin metric has expanded from 4.3% to 20.9%.
Netflix is not without challenges. The company forecasts its lowest subscriber additions in the current first quarter in at least five years. The fear of slowing growth has hammered the stock. The sell-off means growth investors can buy Netflix at its lowest price-to-earnings ratio (34) in the last five years.
DocuSign: A digital document-signing solution
DocuSign offers a full suite of customer agreement solutions. Its most popular service is the e-signature, where businesses can send customers a document to be signed electronically. I have experienced firsthand the convenience this offers. Before the other party to a regularly recurring contract that I need to sign switched to DocuSign, I needed to either print, sign, scan, and send the document or visit the office in person to sign. With DocuSign, it's simpler, and I can sign the agreement without printing.
The convenience advantage can partly explain why DocuSign has grown revenue from $250 million in 2016 to $2.1 billion in 2021. The company is not profitable on the bottom line but is delivering solid cash flow from operations, which exploded to $506 million in its fiscal year ended Jan. 31, from $297 million in the year before.
In addition to growing revenue and cash flow, DocuSign is doing good for the planet. As of Jan. 31, the company's existence has saved 55 billion pieces of paper and earned the gratitude of many a signatory for the convenience.
Like Netflix, DocuSign's stock has fallen due to lowered management guidance related to concerns over slowing growth after the pandemic. DocuSign is now trading at a price-to-cash-flow ratio of 48, which is near the lowest it's been in the last five years.
The verdict
Overall, both Netflix and DocuSign are excellent businesses, but if you had to choose only one, it should be Netflix. The company has proven it can grow on a large scale while simultaneously expanding profit margins.
