Adobe Inc (NASDAQ:ADBE) and DocuSign Inc (NASDAQ:DOCU) were at the right place at the right time when the world moved virtual. Each company has a deep stake in digital documents and signatures, making them essential tools in a virtual world.
It’s unlikely to be temporary either – while a potential vaccine for the virus that’s shut down the world is a great sign for a reopening economy, the push to go green is still alive places like court that you never thought you would see go digital.
But which is the better investment between Adobe vs DocuSign stock?
DocuSign’s narrow focus of electronic signatures and document management is still a big one. It drew $974 million in revenue in 2020, despite the pandemic.
Adobe has a wider range of software offerings, including products for graphic and web design, video and sound production, animation, eLearning, marketing management, server management, and more. However, its larger size may mean more limited growth potential versus its smaller competitor. So which is best?
Adobe Fair Market Value Is…
Adobe Inc is a blue-chip stock that was founded in 1982 off its proprietary PostScript language. It used that licensing revenue to create the portable document format (PDF) still used in a variety of business contracts and documents to this day.
As it continued expanding, it included tools for all the creative professionals not having their needs met by Microsoft’s Office productivity suite.
Its products include Photoshop, Acrobat, Premiere Pro, Dreamweaver, Flash, and more. These platforms are (or in some cases discussed below, were) integral tools in pretty much everything official we do these days.
The company helped pioneer the software-as-a-service (SaaS) business model so popularly used today. It was originally used to combat piracy, and it soon became a solid revenue source. Much of what it does is acquisitions, including a November buy of marketing workflow startup Workfront.
A quick look at the financials (using a discounted cash flow forecast analysis) shows that Adobe has a fair market value right around the $500 price per share level. Above that is a sign the Adobe shares are overvalued, while bargain hunters can keep it on the radar when the share price falls under this line in the sand.
While it’ll continue expanding through the 2020s, one market it left unserved was e-signatures. This allowed DocuSign to expand from a useful app into a full-fledged public company.
DocuSign Has Lots Of Room To Grow
When handling digital documents, it’s necessary to track, secure, and authenticate documents. This is easier said than done, and DocuSign was founded in 2003 and rose to prominence in the past three years for giving businesses, governments, and other organizations the ability to sign and submit legal documents online.
The company went public in 2018 with a $29 IPO share price that raised $629.3 million selling off 21.7 million shares. This valued the company at $4.41 billion, and it was a relatively mild two years until the global pandemic hit.
By the end of 2020, Docusign Inc share prices are trading in the $200 range with a buy mark at $250. Its $35 billion plus market cap is fully capable of growth, as the transition to e-signature isn’t going away, even when the economy goes back to normal.
Investors are mostly bullish, although the growth possibilities are limited by the potential of a stale economy in 2021.
In fact, there are risks to buying both Adobe and DocuSign, as market perception drove tech prices down after Pfizer’s vaccination news was announced in early November.
Des Adobe Stock Have Upside Potential?
Adobe is so large with so many products to support that it leaves money on the table, as evidenced by the existence of DocuSign in the first place.
The company also has less growth potential, and experienced 18.8 percent revenue growth in the quarter leading into the worldwide shutdown.
This is approximately half the 37.6 percent growth reported by DocuSign. Its market capitalization around $225 billion and P/E ratio of 58x could signal it’s approaching full value, particularly if it struggles to grow revenues over the next couple of years.
It’s going to be an uphill battle, especially with its Flash product completing its phaseout by year end. The company could also find itself upended by other companies that find ways around its proprietary software.
Mobile photo editing and music production, for example, are filled with apps and tools to make things easier.
Dangers Of Investing In DocuSign
Being a smaller company, Docusign has less free cash flow than Adobe, at $15.5 million versus $1.231 billion.
It also reported an operating loss in the pre-coronavirus quarter of $42.4 million. At it inched closer to profitability in the aftermath of the pandemic, it followed Adobe’s lead with several acquisitions.
These buys may pay off in the long term, but it’ll create drag in the short term. Just like it grew faster than Adobe (ADBE) post-pandemic, it also dropped a little harder upon announcement of an effective vaccine.
Of course, being smaller than Adobe has advantages in that the company could more easily be acquired if it ran into financial trouble. At this point, everyone is getting involved in e-signatures, and the market is likely to remain essential, especially during a pandemic or other natural disaster.
DocuSign Vs Adobe Stock: The Bottom Line
Adobe and DocuSign (DOCU) have apps at the foundation of secure business contracts and other processes. Their utility was proven long before the coronavirus, but the pandemic’s shift to work-from-home and homeschool gave them big revenue boosts. This caused them to pursue acquisitions that could help them expand their long-term revenues.
DocuSign is at risk of losing its financial runway if it can’t keep pulling in the same revenue. A reported quarter of losses in 2021 would surely deflate market confidence. Adobe has the cash to weather the storm, but its Flash product lost relevance, and there’s no guarantee for any of its apps to stay status quo.
Each has risks, but they also have useful technology that are at the foundation of a lot of B2B and government business. This means they’re likely to continue some form of usage as a necessary cloud-based utility in an increasingly digital world.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.