In this piece, I evaluated two Software-as-a-Service (SaaS) stocks, DocuSign, Inc. (DOCU) and C3.ai, Inc. (AI), to determine which is a better investment. I believe DOCU is the better buy for the reasons explained throughout this article.
Gone are the days of traditional software, which had to be installed and maintained on a system or a company’s server. Traditional software is being rapidly replaced by SaaS, a highly efficient cloud-based software delivery model in which software applications are provided over the Internet.
As these software applications are hosted on the cloud, they can provide several advantages, such as lower operational costs, scalability, flexibility, and accessibility. According to Gartner, SaaS spending is projected to grow 17.9% year-over-year to $197.29 billion in 2023.
Despite the uncertain macroeconomic conditions, DOCU surpassed the consensus estimates during the fourth quarter ended January 31, 2023. Its EPS came 24% above the consensus estimate, while its revenue beat the analyst estimates by 3.1%. The company’s non-GAAP operating margin for fiscal 2023 was 21%. Also, its subscription revenue rose 20% year-over-year to $2.40 billion.
DOCU’s new CEO Allan Thygesen said, “We finished the year strong, delivering across our key financial metrics and making tangible progress on our strategic priorities. We are reshaping DocuSign to invest in our innovation roadmap and self-service capabilities. Looking ahead, we aim to drive profitable growth at scale by executing our mission of smarter, easier, and trusted agreements.”
AI also delivered better-than-expected results during the third quarter. Its adjusted loss per share came lower than the adjusted loss of $0.22 expected by analysts. Although its revenue declined year-over-year, it exceeded the consensus estimate of $64.20 million.
AI’s CEO Thomas M. Siebel said, “In the course of the third quarter, we validated our transition to a consumption-based pricing model, expanded our partner ecosystem, expanded our business pipeline, and delivered industry-leading product innovation in enterprise AI. We remain on track to become cash positive and non-GAAP profitable by the end of FY 24.”
For the fiscal year ending January 31, 2024, DOCU expects its total revenue to be between $2,695 million and $2,707 million. Its subscription revenue is predicted to come between $2,633 million and $2,645 million, while its Billings are expected between $2,705 and $2,725 million. Its non-GAAP gross margin and operating margin are expected to be 81-82% and 21-23%, respectively.
On the other hand, for fiscal 2023, AI expects total revenue to be between $266.50 million and $266.80 million, while its non-GAAP loss from operations is predicted to come between $68.20 million and $68.40 million. Its net cash used in operating activities is expected to be between $113.30 million and $114.70 million.
In February, Spruce Point Capital Management, LLC alleged evidence of a severely challenged partnership with Baker Hughes, a related party and AI’s largest customer. It also reported signs of problematic financial reporting and accounting related to the Baker Hughes joint venture. It also claimed that there were many discrepancies on matters like the pace of its market growth, its total addressable market, etc.
In April, Kerrisdale Capital Management, in a letter to AI’s independent auditor Deloitte, alleged that the enterprise-AI company was involved in highly aggressive accounting to inflate its income statement metrics to meet sell-side analyst estimates for revenue and certain profit metrics and to conceal significant deterioration in its underlying operations.
On May 15, 2023, AI announced that investigations into the allegations brought by the two short sellers found that none of the allegations or insinuations of wrongdoing were supported by facts, and no irregularities, misrepresentations, or omissions in the company’s prior disclosures were identified.
When it comes to price performance, AI is the clear winner. AI’s stock has gained 125.3% in price over the past six months compared to DOCU’s 15.9%. In addition, AI’s stock has gained 57.7% over the past year, compared to DOCU’s 31.4% decline.
However, here are the reasons I think DOCU could perform better in the near term:
Recent Financial Results
DOCU’s total revenue for the fourth quarter ended January 31, 2023, increased 13.6% year-over-year to $659.58 million. Its Subscription revenue rose 14.1% year-over-year to $643.68 million. The company’s non-GAAP gross profit increased 15.8% year-over-year to $544.41 million.
Also, DOCU’s non-GAAP net income attributable to common stockholders rose 33.5% over the prior-year quarter to $133.28 million. In addition, its non-GAAP EPS came in at $0.65, representing an increase of 35.4% year-over-year.
AI’s total revenue for the third quarter ended January 31, 2023, declined 4.4% year-over-year to $66.67 million. Its Subscription revenue declined marginally over the prior-year quarter to $57.04 million. The company’s non-GAAP gross profit decreased 8.6% year-over-year to $50.96 million.
AI’s non-GAAP net loss narrowed 20.4% year-over-year to $6.16 million. Also, its non-GAAP loss per share narrowed 14.3% year-over-year to $0.06.
Expected Financial Performance
DOCU’s EPS for fiscal 2024 and 2025 is expected to increase 18.7% and 10.3% year-over-year to $2.41 and $2.66. Its revenue for fiscal 2024 and 2025 is expected to increase 7.5% and 7.4% year-over-year to $2.70 billion and $2.91 billion. Its EPS and revenue for the quarter ending July 31, 2023, are expected to increase 46.7% and 9% year-over-year to $0.56 and $641.58 million, respectively.
For fiscal 2023 and 2024, AI’s EPS is expected to remain negative. Its revenue for fiscal 2023 and 2024 is expected to increase 5.2% and 19.3% year-over-year to $265.79 million and $317.11 million. Its EPS for the quarter ended April 30, 2023, is expected to remain negative. Its revenue for the same quarter is expected to decline 1.4% year-over-year to $71.34 million.
Profitability
DOCU’s trailing-12-month revenue is 9.4 times what AI generates. DOCU is more profitable, with an EBITDA margin and levered FCF margin of 0.32% and 29.46%, compared to AI’s negative 101.14% and 42.06%, respectively. Also, DOCU’s asset turnover of 0.91x compares to AI’s 0.23x.
Valuation
In terms of forward EV/Sales, DOCU is currently trading at 3.95x, 55.2% lower than AI’s 8.82x. DOCU’s trailing-12-month Price/Sales ratio of 4.27x is 62.2% lower than AI’s 11.30x.
Thus, DOCU is relatively more affordable.
POWR Ratings
DOCU has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, AI has an overall rating of F, translating to a Strong Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. DOCU has a B grade for Quality, in sync with its high profitability. AI’s poor profitability justifies its D grade for Quality.
DOCU has an A grade for Growth, consistent with its stable rise in revenue and levered FCF. On the other hand, AI has a C grade for Growth, in sync with the company’s mixed financial performance.
Of the 24 stocks in the B-rated Software-SAAS industry, DOCU is ranked #7, while AI is ranked #23 in the same industry.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, Stability, and Sentiment. Click here to view DOCU’s ratings. Get all the ratings of AI here.
The Winner
The SaaS industry is well-positioned for growth in the long term. Despite the macroeconomic headwinds, DOCU expects to continue its strong showing in fiscal 2024.
On the other hand, AI’s profitability is still a few quarters away as it expects to be net cash positive and non-GAAP profitable by fiscal 2024. Earlier this year, two short sellers made some big allegations about AI. Although the company has denied any wrongdoing, an investor must complete their due diligence before buying shares of AI, as the allegations were grave.
Considering these factors and the fundamentals, DOCU could be a better investment than AI.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Software-SAAS industry here.
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DOCU shares were trading at $55.13 per share on Friday morning, up $1.79 (+3.36%). Year-to-date, DOCU has declined -0.52%, versus a 10.05% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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