Generally speaking, I don't place too much weight on valuation, at least not initially. If I find a business that checks all the right boxes -- strong sales growth, durable competitive edge, big market opportunity -- I typically buy a few shares even if it's trading at an absurd price. From that point forward, my goal is to build the position by adding more shares at successively lower valuations.
On that note, DocuSign (DOCU -0.26%) and PayPal Holdings (PYPL 2.90%) have taken a beating in the past year (along with many other growth stocks), and shares of both companies currently trade more than 60% off their highs. Of course, that hurts if you're a shareholder like me, but it also creates a buying opportunity. Both stocks look relatively cheap right now.
Here's what you should know.
Image source: Getty Images.
1. DocuSign
Agreements are an essential part of most businesses. On a daily basis, organizations negotiate contracts and strike deals with customers, employees, and partners. But the paper-based, manual processes traditionally used to prepare and act on those agreements tend to be slow, costly, and prone to human error. That's where DocuSign can make a difference.
Its Agreement Cloud platform digitizes and automates agreement workflows. For instance, its core product is DocuSign eSignature, a tool that allows clients to capture legally valid signatures on digital documents from virtually any device and location. That accelerates turnaround time -- 44% of transactions are completed in just 15 minutes -- and it boosts productivity. Thanks to its industry-leading array of add-on products and integrations, DocuSign has become the gold standard in electronic signature software, holding about 70% market share.
Better yet, the Agreement Cloud comprises a number of other industry-leading products. DocuSign Contract Lifecycle Management automatically generates contracts using data in other systems, and DocuSign Insight leans on artificial intelligence to analyze and score agreements based on risk. Beyond that, the Agreement Cloud includes tools for electronic notarization and payment processing, as well as industry-specific solutions for real estate, financial services, and government clients.
The company's strong competitive edge has fueled strong financial results. Last year, DocuSign grew its customer base by 31% to 1.2 million, and the average customer spent 19% more. In turn, revenue climbed 45% to $2.1 billion, gross margin expanded 290 basis points to 77.9%, and free cash flow soared 107% to $445 million.
Despite that strong performance, DocuSign has captured just 4% of its $50 billion addressable market, leaving a long runway for this industry-leading company to grow its business. And with shares trading at 10.2 times sales, the stock is a good deal cheaper than it has been in a while. DocuSign has sported an average price-to-sales ratio of 18.7 since going public in 2018 -- that's why now looks like a good time to buy this growth stock.
2. PayPal Holdings
The PayPal brand is synonymous with digital payments. Over the years, it has built an extensive ecosystem of financial products and services. That includes merchant solutions for financing, marketing, fraud prevention, payment processing, consumer solutions for online and in-store checkout, person-to-person (P2P) payments, and cryptocurrency trading. That broad portfolio has helped PayPal become the most-accepted digital wallet in North America and Europe, and that competitive edge has been a powerful growth driver.
Last year, PayPal saw active accounts climb 13% to 426 million, and transactions per active account jumped 11% to 45.4, indicating an uptick in engagement. Revenue rose 18% to $25.4 billion, and free cash flow climbed 9% to $5.4 billion. Better yet, PayPal is well-positioned to maintain (or even accelerate) that momentum in the coming quarters and years.
In 2021, PayPal's total payment volume (TPV) jumped 33% to $1.3 trillion, meaning it has captured just over 1% of its $110 trillion addressable market. To capitalize on that opportunity, the company revamped its mobile app last year, which features new functionality like shopping tools for deal discovery and rewards and high-yield savings accounts. That's particularly noteworthy because the number of digital wallet users is expected to double by 2025.
Likewise, PayPal partnered with Instacart and Roku last year, and it extended its partnership with Adobe and Salesforce, expanding its merchant ecosystem. And later this year, Venmo will launch on Amazon and Starbucks, meaning the ultra-popular digital wallet will be accepted by the largest online retailer and coffee shop brand in North America. Each of those developments could be a significant tailwind for the company.
In short, PayPal has established itself as a leader in a massive and growing industry, and with shares trading at 5.7 times sales, the stock looks cheap compared to its five-year average of 8.8 times sales. That's why now is a great time to add this fintech stock to your portfolio.
