Financial basis

Is DocuSign Stock Buy It Now?

DocuSign (DOCU -24.53%) the stock plunged 23% in after-hours trading on June 9 after the release of its first-quarter earnings report. The e-signature and contract management services provider posted 25% year-over-year revenue growth to $588.7 million, beating analysts’ expectations of $6.8 million dollars.

However, its adjusted net income fell 16% to $77.5 million, or $0.38 per share, eight cents below analyst consensus. According to generally accepted accounting principles (GAAP), its net loss more than tripled, from $8.4 million to $27.4 million.

Image source: Getty Images.

Those numbers were messy, but DocuSign shares are now trading nearly 80% below their all-time high from last September. Should investors start hoarding shares of this fallen growth stock?

What does DocuSign do?

DocuSign has captured approximately 70% of the e-signature market since its inception in 2003. It ended the first quarter of fiscal 2023 with 1.24 million customers, representing growth of 25% from a year ago. is a year old, and it already serves most of the top Fortune 500 financial, healthcare and technology companies.

Its platform provides over 350 pre-built integrations with popular business apps. It bundles these tools with its contract management services in its subscription-based DocuSign Agreement Cloud. This sticky ecosystem has steadily expanded as more businesses have digitized their operations, eliminated paper-based contracts, and shifted to remote and hybrid workflows.

DocuSign was growing at an impressive rate before the pandemic. However, its revenue and billing growth accelerated through fiscal 2020 and 2021 as the pandemic forced more people to work online.

Growth (YOY)

FISCAL YEAR 2019

FISCAL YEAR 2020

FISCAL YEAR 2021

FISCAL YEAR 2022

Revenue

35%

39%

49%

45%

Billings

34%

38%

56%

37%

Data source: DocuSign. YOY = year after year.

But those “hypergrowth” days are over.

DocuSign’s meteoric revenue growth initially impressed the bulls. But starting in the second half of fiscal 2022, DocuSign began issuing more flexible revenue guidance and warned it would face tough year-over-year comparisons in a post-lockdown world. throughout fiscal year 2023.

For the current quarter, DocuSign expects revenue to grow 17% to 18% year-over-year, while billings grow only 1% to 2%. For the full year, management expects revenue growth of 17% to 18% with billings up 5% to 6%.

During the conference call with investors, Chief Financial Officer Cynthia Gaylor said while the company remained “confident” in its long-term prospects, it was not “immune to macro challenges with our customers and the peer space.

DocuSign also faces strong competition from other electronic signature players such as Adobe Sign and drop boxit’s HelloSign. Adobe bundles Sign with its other Document Cloud services and Dropbox integrates HelloSign with its cloud-based storage platform.

Simply put, DocuSign will have to manage post-lockdown comparisons, macroeconomic challenges, and competitive headwinds simultaneously this year. This relentless pressure drove most of the bulls away.

Its operating margins are shrinking

Over the past several years, DocuSign’s non-GAAP gross margin has consistently hovered around 80% as its operating margin has grown.

Metric (non-GAAP)

FISCAL YEAR 2019

FISCAL YEAR 2020

FISCAL YEAR 2021

FISCAL YEAR 2022

Gross margin

80%

79%

79%

82%

Operating margin

2%

5%

12%

20%

Data source: DocuSign.

For bulls, this continued expansion meant that DocuSign still had significant pricing power and economies of scale kicked in.

But in fiscal 2023, DocuSign expects its non-GAAP gross margin to drop from 79% to 81% and its non-GAAP operating margin to increase to 16% to 18%, even though Gaylor said the company was “already moderating our spending.” and managing our hiring plans at a more measured pace” for the full year. As a result, analysts expect DocuSign’s adjusted earnings per share (EPS) to decline 1% for the full year.

Is DocuSign’s stock finally too cheap to ignore?

DocuSign’s advice may seem fine for a mature tech stock, but the company was rated as a hypergrowth stock. When its stock price hit an all-time high of $314.76 last August, the company was valued at more than $60 billion, or 35 times its sales.

Since hitting that valuation peak, inflation, rising interest rates and other macroeconomic headwinds have driven investors away from more expensive growth stocks, especially those that are unprofitable. That’s why DocuSign now trades at only six times its sales.

This price / sales ratio seems much more reasonable. For reference, Adobe, which is solidly profitable and expected to generate 13% sales growth this year, is trading at 12x sales. Selling powera major DocuSign partner that expects to generate 20% sales growth this year, is also trading at six times its sales.

In this light, DocuSign is still not a bargain. Its business is growing, but its valuation could be further compressed as investors worry about its near-term slowdown.