Digital currencies have great potential in a world that is increasingly going digital. This part of the economy is booming, so it’s no surprise to see demand for these currencies continue to grow.
I bought some Bitcoin last year, but one thing that bothers me is the volatility. Growth stocks can be volatile, too, but at least when the share price of a good business plummets, I can look at the company’s revenue and profit potential to get an idea where the stock is going over the long term. On the other hand, analyzing cryptocurrencies after a steep drop in price can feel like trying to find the flashlight when the power goes out.
DocuSign is a popular service that helps businesses electronically prepare, sign, and manage contracts and other agreements. It has over 1 billion users who rely on its cloud document solutions, and it’s been growing at a brisk pace. Revenue increased 179% over the last three years to reach $1.9 billion, but the stock recently collapsed after a disappointing earnings report.
Investors were spooked over decelerating revenue and billings growth. As CEO Dan Springer said in a statement, “After six quarters of accelerated growth, we saw customers return to more normalized buying patterns.”
But we need to remember what a “normalized buying pattern” for DocuSign looks like. Before the pandemic, in fiscal 2020, the company reported a robust growth rate of 39% in revenue. That doesn’t mean forward growth will match fiscal 2020’s rate, but there was clearly a blip during the pandemic as businesses rushed to operate digitally. DocuSign’s growth accelerated to 57% year over year during the fiscal fourth quarter of 2021. Even if it doesn’t maintain that breakneck pace beyond the pandemic, the long-term opportunity of more organizations shifting to digital services provides plenty of upside for the stock price.
As Springer noted on the most recent earnings call, “Even as the pandemic subsides and people begin to return to the office, they are not returning to paper.” Management estimates the long-term addressable market for its services at $50 billion, so it can grow for a long time. Plus, its dollar retention rate was 121% last quarter, showing that existing customers are spending on additional services.
In the near term, DocuSign will step up spending on sales capacity, training, and field enablement to speed up expansion of its customer base. It shouldn’t have a problem doing that given the time savings and improved efficiency businesses gain by using DocuSign’s cloud platform to manage pesky paperwork.
With the stock down 45% in the last three months since the earnings report, much of the air has been let out of the stock’s high valuation. But the stock won’t stay down forever with the growth opportunities in DocuSign’s future.
The Trade Desk
The Trade Desk is an advertising management platform that is seeing explosive growth as media increasingly becomes digital. The stock returned 539% over the last three years but has underperformed over the last year — up 5.8% at the time of writing. An acceleration in the digital advertising market, particularly with increasing interest from advertisers to get ads in front of video streaming viewers, could be a boon for The Trade Desk over the next few years, considering the company has access to a broad portfolio of premium connected TV ad inventory.
The platform launched in 2011 after founder and CEO Jeff Green recognized a lot of inefficiency in internet advertising. Green previously worked at Microsoft, where he oversaw the software giant’s AdECN online advertising exchange business. The Trade Desk basically helps large ad agencies and technology companies know what they are buying and provides a data-driven platform that helps advertisers manage their campaigns.
As advertising spending picked up last year, revenue growth accelerated to 55% year over year through the first three quarters of the year. The Trade Desk cited strength in connected TV platforms. The company recently expanded its partnership with Comcast‘s NBCUniversal, which will allow advertisers to access Peacock’s video-on-demand inventory on The Trade Desk’s platform.
The total advertising market is estimated to increase from $750 billion to over $1 trillion in the next three years, according to IDC. Green believes all advertising will be digital one day. His company has enormous growth potential, with just $1.1 billion in trailing-12-month revenue.
Naturally, The Trade Desk stock is expensive, trading at a price-to-earnings ratio of 93 based on adjusted earnings over the last four quarters. But if the stock market dipped in the near term, I would rather buy shares of a fast-growing business that produces a profit than a digital currency that doesn’t produce anything and is difficult to value with any degree of confidence.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.