DocuSign (DOCU 0.09%) and ServiceNow (NOW 2.12%) both simplify and streamline tasks for companies with their cloud-based services. DocuSign is the world's largest provider of e-signature services, while ServiceNow's services help companies organize their unstructured work patterns into automated digital workflows.
But over the past three years, DocuSign's stock plunged nearly 70% as ServiceNow's stock rallied by roughly the same amount. Let's see why these two stocks went in opposite directions -- and if ServiceNow is still a better buy than DocuSign.
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What happened to DocuSign?
DocuSign was once considered a hypergrowth stock. From fiscal 2017 to fiscal 2022 (which ended in January 2022), its revenue increased at a whopping compound annual growth rate (CAGR) of 41%. It also experienced a major growth spurt during the pandemic as more companies relied on e-signatures and digital contracts.
However, its revenue only rose 19% in fiscal 2023 and grew 10% in fiscal 2024. It expects its revenue to only rise 4% to 5% in fiscal 2025. It blamed that slowdown mainly on tough comparisons to the pandemic and the macroeconomic headwinds, but it also faces stiff competition from Adobe, Dropbox, and other companies that are integrating their own e-signature services into their platforms.
DocuSign's CEO Dan Springer also abruptly resigned in June 2022 as the company's growth stalled out. His successor, Allan Thygesen, is trying to expand DocuSign's ecosystem with new artificial intelligence (AI) features, digital contract tools, and tighter integrations with popular collaboration platforms like Microsoft Teams, Zoom Video Communications, and Salesforce's Slack. Thygesen also wants the company to expand into more overseas markets.
But at the same time, DocuSign is trying to cut costs to stabilize its margins. The company finally turned profitable on a generally accepted accounting principles (GAAP) basis in fiscal 2024, and analysts expect its GAAP EPS to jump 111% in fiscal 2025. They also expect its non-GAAP EPS to rise 9%. Based on those estimates, DocuSign's stock looks reasonably valued at 19 times its forward-adjusted earnings.
Those rising profits are encouraging, but it could struggle to balance its expansion efforts with its cost-cutting measures as it faces more competitive headwinds.
Why did ServiceNow keep climbing?
ServiceNow has grown at a much steadier rate than DocuSign. From 2016 to 2021, its revenue grew at a CAGR of 33% as more companies used its tools to streamline, automate, and accelerate their digital workflows. The pandemic also drove more companies to ramp up those digital transformations.
Its revenue rose 23% in 2022 and 24% in 2023, even as the macro headwinds drove more companies to rein in their software spending. For 2024, it expects its subscription revenue (which accounts for most of its top line) to grow another 22%. It still expects to generate $16 billion in revenue in 2026 -- which would represent a CAGR of 21% from 2023.
ServiceNow is firmly profitable on a GAAP basis, and its adjusted EPS increased 42% in 2023. Analysts expect that figure to rise another 25% in 2024, but its stock isn't a screaming bargain at 57 times forward earnings. Nevertheless, its steady growth rates and its exposure to the booming AI market might justify that higher valuation.
Its Now Assist AI platform -- which is used by companies like Microsoft, IBM, Equinix, and Hitachi -- leverages generative AI tools to optimize digital workflows. During its latest conference call, CEO Bill McDermott -- who has led the company since 2019 -- called AI a "catalyst for business transformation" and said that "ServiceNow's strategic relevance as the AI platform for business transformation has never been higher."
The better buy: ServiceNow
DocuSign and ServiceNow both lead their respective niches of the cloud market. But it's obvious why ServiceNow outperformed DocuSign by such a wide margin over the past three years, and why it will likely remain the better buy for the foreseeable future. DocuSign hasn't proven that its turnaround efforts will actually work, but ServiceNow operates an evergreen business model that is naturally built to withstand economic downturns.
