DocuSign (DOCU -0.26%) and Dropbox (DBX 0.92%) both simplified how companies conduct business with their digital platforms. DocuSign, which controls about 70% of the global e-signature market, eliminated the need for paper-based documents and stored digital contracts and signatures on its cloud-based platform instead. Dropbox's cloud platform allows people to save their documents and collaborate on projects remotely. It also expanded into the e-signature market with its acquisition of HelloSign in 2019.
Yet both of these stocks have generated volatile and mediocre returns since their IPOs. DocuSign went public at $29 in April 2018, and its stock skyrocketed to an all-time high of $310.05 on Sept. 3, 2021, before stumbling back to the low $50s. Dropbox went public at $21 in March 2018 and hit its all-time high of $42 that June. But today, it trades at less than $30.
Image source: Getty Images.
Investors lost interest in both companies as their growth decelerated, the competitive threats became more apparent, and rising interest rates punished imperfect tech stocks. But should you consider buying either of these out-of-favor stocks today?
What happened to DocuSign?
DocuSign's revenue rose 49% in fiscal 2021 (which ended in January 2021) as the pandemic drove more companies to use its e-signature services and grew another 45% in fiscal 2022. But in fiscal 2023, its revenue only rose 19% to $2.4 billion as the pandemic passed and inflation, rising interest rates, and other macro headwinds throttled its growth. Competition from other similar services -- including Adobe Sign, which is integrated with Acrobat, and Dropbox's Sign (formerly HelloSign), which is bundled with its other cloud services -- likely exacerbated that slowdown.
DocuSign doesn't expect those headwinds to dissipate anytime soon. For fiscal 2024, it expects its billings to only rise 3% to 4% as its total revenue grows 8%. Analysts expect its revenue to rise 8% this year and 7% in fiscal 2025.
To stabilize its business amid that slowdown, DocuSign laid off 9% of its workforce last year and another 10% of its remaining employees earlier this year. That's why it expects its adjusted operating margin to expand from 21% in fiscal 2023 to 22% to 24% in fiscal 2024 -- even as it rolls out newer features like easy-to-create Web Forms for gathering online data, more sophisticated ID verification tools, integrations with electronic health records in the United States, and generative AI summaries of longer contracts. Analysts expect its adjusted EPS to grow 26% this year and rise 5% in fiscal 2025.
Those growth rates are decent, and its stock seems reasonably valued at 21 times forward earnings and 4 times this year's sales. But it probably won't win back the growth investors who fell in love with the stock during the pandemic.
What happened to Dropbox?
Dropbox's revenue rose 15% in 2020, 13% in 2021, and only 8% to $2.3 billion in 2022. Some of that slowdown can be attributed to the macro headwinds, but intense competition from much larger cloud storage platforms like Alphabet's (GOOG 9.96%) (GOOGL 10.22%) Google Drive, Microsoft's (MSFT 1.82%) OneDrive, and Apple's iCloud -- all of which are tethered to larger tech ecosystems -- could also be curbing its near-term growth.
Just like those larger cloud-based storage services, Dropbox operates a freemium model which grants additional features -- like camera uploads, offline folders, text searches, document scanning tools, and support for e-signatures -- to its paid users. However, Google, Microsoft, and Apple can all afford to take losses on their cloud-based storage lockers to drive more users to their other paid services. Analysts expect its slowdown to continue, with 7% sales growth in 2023 and 5% growth in 2024.
That deceleration is disappointing, but Dropbox remains firmly profitable after laying off about 16% of its workforce earlier this year. AI could also play a big role in Dropbox's future; it's hinted at replacing some of its human roles with AI services, and it recently rolled out a new AI-powered universal search tool called Dropbox Dash.
Analysts expect its earnings to grow 17% this year and 12% in 2024. Its stock looks cheap at 15 times forward earnings, but it's easy to find more stable blue chip tech stocks that trade at comparable valuations.
The better buy: DocuSign
I wouldn't rush to buy either of these stocks right now. But if I had to pick one over the other, I'd stick with DocuSign because it's a market leader with a more defensible niche, it faces milder competitive headwinds, and it's growing faster. Dropbox still needs to prove that it can stand out in the crowded cloud storage services market without crushing its own margins.
