Zoom Video Communications (ZM -0.54%) and DocuSign (DOCU 0.69%) were two high-flying darlings of the "pandemic-stock" era. However, each stock has seen dramatic valuation pullbacks now that business tailwinds have eased and investors have adopted more cautious positions when it comes to growth-dependent companies. On the heels of big sell-offs, which beaten-down stock looks like the better buy? Read on to see why these two Motley Fool contributors don't agree.
Zoom still has big growth potential
Keith Noonan: Zoom was a stock market darling when social-distancing and shelter-in-place conditions drove a surging demand for its services. However, the company's share price has seen a dramatic pullback now that those tailwinds have lessened and investors have fled from growth stocks due to inflation, rising interest rates, and other pressures. The stock now trades down roughly 80% from its high.
The company is facing changing sales composition and challenging comparisons now that many of the pandemic-related catalysts that helped drive incredible growth have evaporated. Despite underwhelming performance for the company's consumer segment, Zoom's revenue climbed 12% year over year to reach roughly $1.07 billion in the first quarter thanks to a 31% sales increase from the enterprise segment.
Zoom provides a comprehensive communications platform that can easily integrate with and improve workflows. Even as many people return to the office, it's likely that work-from-home and work-from-anywhere trends are here to stay. The company's services also offer businesses an opportunity to reduce office expenses and other costs over the long term.
The company now has a market capitalization of roughly $32 billion and is valued at approximately 7.1 times this year's expected sales and 28 times expected earnings. Zoom still has a growth-dependent valuation, but the stock presents an attractive risk-reward dynamic at current prices. Zoom also ended Q1 with roughly $5.7 billion in cash and short-term investments against zero debt, giving it plenty of financial flexibility to pursue more growth projects and acquisitions that can strengthen its place in the communications services space. There's a lot to like here.
The case for DocuSign
Parkev Tatevosian: DocuSign is an excellent company that can simultaneously do wonders for your wealth and the planet. The electronic-services provider has thrived as it provided convenience to businesses and individuals. And, fortunately for investors, DocuSign is trading at its lowest price in years.
DocuSign has grown revenue from $519 million to $2.1 billion in its previous three years. Similarly, DocuSign has increased its cash flow from operations (CFO) from $55 million to $506 million in that time. The company is not yet profitable on the bottom line, but if it keeps going at this pace, it could only be a matter of time.
An electronic signature has several benefits for enterprises: Electronic documents take up less space, are more easily searched, and help companies to save on storage expenses. Signing documents electronically saves clients the time and hassle of putting pen to paper.
Of course, signing contracts electronically reduces the need for paper. According to DocuSign, its services have helped save 55 million pieces of paper and more than six million trees. Its benefits to the planet could help DocuSign to gain prominence from a human population that is finally placing greater importance on preservation.
DOCU Price to Free Cash Flow data by YCharts
To make the investment case in DocuSign more enticing, shares are selling at the lowest price in years. At a price-to-free cash flow (P/FCF) ratio of 25, investors have scarcely had an opportunity to buy at a lower value.
Which stock should you go with?
Both Zoom and DocuSign have seen dramatic valuation pullbacks and can be purchased at huge discounts compared to their pricing highs. Investors could be well served by taking a buy-and-hold approach to each stock. However, if you're only looking to invest in one of these companies, the best thing to do is weigh each business's competitive strengths and growth potential against current valuation levels and proceed from there.
