We think that video conferencing major Zoom stock (NASDAQ: ZM), which emerged as a household name through the Covid-19 pandemic, is currently a better pick compared to digital signature player Docusign stock (NASDAQ: DOCU), despite the reopening of physical spaces following Covid-19. While DocuSign trades at about 29x trailing revenue, Zoom trades at a more reasonable 20x trailing revenue. Moreover, Zoom’s adjusted profits are also considerably higher than DocuSign’s. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard DocuSign vs Zoom Video Communications: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.
1. Zoom’s Revenue Growth Has Been Stronger
Both companies have benefited meaningfully from the shift toward remote workplaces due to the lockdown restrictions as the Covid-19 pandemic spread across the world. Zoom’s revenues grew by about 54% over the most recent quarter, while DocuSign’s sales rose 50%. Looking at a longer time frame, Zoom’s revenues have risen at a compounded rate of about 160% over the last three years, although this was largely due to the unprecedented surge the company saw through the pandemic (FY’21 sales grew 4x). On the other hand, DocuSign has grown revenue at a compounded rate of 41% over the last three years, with its growth rates remaining more consistent versus Zoom.
Looking forward, Zoom’s revenues are estimated to grow 51% y-o-y in fiscal 2022, to about $4 billion, per consensus estimates. On the other side, DocuSign’s revenues are projected to rise by about 43% to about $2.1 billion in 2022. While both companies are projected to see growth rates cool off further in the coming years, we think DocuSign’s growth rates could decline less versus Zoom.
2. Zoom’s Margins Are Thicker Than DocuSign’s
Docusign remains loss-making on a GAAP basis, with its operating margins standing at about -9.5% over the last twelve months. However, Zoom posted margins of about 26.6% over the last 12 month period. That said, adjusted operating margins are probably a better metric for young software companies, given the large potential stock-based compensation and Zoom scores over DocuSign here as well. Over Q2 FY’22, Zoom’s non-GAAP operating margin stood at almost 42% compared to about 19% for DocuSign.
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DocuSign’s adjusted margins have also improved from roughly break-even levels in Q2 FY’20 to levels of around 19% in Q2 FY’22, while Zoom’s margins have seen a larger increase from roughly 14% in Q2 FY’20 to about 42% in Q2 Q2’FY22. Looking ahead, we think that both companies have scope to improve their adjusted margins given their largely fixed cost structures, subscription-based models, and strong growth.
The Net of It All
With over half of the U.S. population now fully vaccinated against Covid-19 and promising Covid-19 treatments on the horizon, the demand for software tools focused on the remote working and collaboration trend is certainly poised to cool. Now Zoom, the quintessential “pandemic stock,” is likely to see a bit more pressure in this environment, as the company’s tools were used as an alternative for in-person meetings which should resume as people gradually head back to offices and schools. DocuSign’s business, on the other hand, could prove a bit more resilient, as e-signatures tools are here to stay even post the pandemic, as businesses likely move away from physical documents to more seamless digital solutions even after workplaces re-open.
That said, Zoom has also been adapting itself to becoming a platform of sorts, with new features and applications that cater to hybrid and distributed workspaces. Zoom is also increasingly focusing on larger businesses, as it has over half a million customers with more than 10 employees and this could give it better revenue stability. Overall, we think that Zoom stock is a better pick when compared at current levels considering its lower valuation of 20x trailing revenue, versus about 29x for DocuSign, and also due to its stronger margins. Moreover, Zoom stock remains down by about 25% year-to-date, potentially presenting a good entry point for investors.
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