Best Bear Market Buy: Zoom vs. DocuSign
Focus on video communications (ZM 2.57%) and DocuSign (DOCU 5.31%) were two high-flying darlings of the “pandemic stock” era. However, each stock has seen dramatic valuation declines now that business tailwinds have died down and investors have taken more cautious stances on growth-dependent companies. In the wake of the big sell-offs, which stock cut seems like the best buy? Read on to see why these two Motley Fool contributors disagree.
Zoom still has great growth potential
Keith Noonan: Zoom was a stock market darling when social distancing and shelter-in-place conditions led to growing demand for its services. However, the company’s share price has seen a dramatic pullback now that these tailwinds have died down and investors have fled growth stocks due to inflation, rising interest rates and other pressures. The stock is now trading around 80% off its peak.
The company faces a changing sales mix and tough comparisons now that many of the pandemic-related catalysts that helped drive incredible growth have evaporated. Despite a disappointing performance for the company’s consumer segment, Zoom’s revenue grew 12% year-over-year to approximately $1.07 billion in the first quarter on the back of a 31% increase business segment sales.
Zoom provides a complete communication platform that can easily integrate and improve workflows. Even though many people are returning to the office, it’s likely that the work-from-home and work-from-anywhere trends are here to stay. The company’s services also offer businesses the opportunity to reduce office expenses and other long-term costs.
The company now has a market capitalization of around $32 billion and is valued at around 7.1 times expected sales this year and 28 times expected earnings. Zoom still has a growth-dependent valuation, but the stock presents attractive risk-reward dynamics at current prices. Zoom also ended the first quarter with approximately $5.7 billion in cash and short-term investments against zero debt, giving it ample financial flexibility to pursue more growth projects and acquisitions that can strengthen its place in the communication services space. There’s a lot to love here.
The case of DocuSign
Parkev Tatevosyan: DocuSign is a great company that can simultaneously do wonders for your wealth and the planet. The electronic service provider flourished because it offered convenience to businesses and individuals. And, fortunately for investors, DocuSign is trading at its lowest price in years.
DocuSign has grown its revenue from $519 million to $2.1 billion over the past three years. Similarly, DocuSign increased its cash flow from operations (CFO) from $55 million to $506 million during this period. The company is not financially profitable yet, but if it continues at this rate, it could only be a matter of time.
An electronic signature has several advantages for companies: electronic documents take up less space, are easier to find and help companies save on storage expenses. Signing documents electronically saves customers time and the hassle of putting pen to paper.
Of course, signing contracts electronically reduces the need for paper. According to DocuSign, its services have saved 55 million sheets of paper and more than six million trees. Its benefits to the planet could help DocuSign gain prominence with a human population that is finally placing greater importance on preservation.
To make the investment case in DocuSign more attractive, the stock is selling at the lowest price in years. With a price-to-free-cash-flow (P/FCF) ratio of 25, investors barely had a chance to buy at anything lower.
Which action to choose?
Both Zoom and DocuSign have seen dramatic valuation declines and can be purchased at huge discounts from their high prices. Investors could be well served by adopting a buy and hold approach to each stock. However, if you are only looking to invest in one of these companies, the best thing to do is to weigh each company’s competitive forces and growth potential against current valuation levels and go from there.
Keith Noonan has no position in the stocks mentioned. Parkev Tatevosian holds positions in DocuSign and Zoom Video Communications. The Motley Fool fills positions and recommends DocuSign and Zoom Video Communications. The Motley Fool recommends the following options: January 2024 long calls at $60 on DocuSign. The Motley Fool has a disclosure policy.