75% Upside in Docusign Share Price?

Shares of electronic signature software provider DocuSign (NASDAQ:DOCU) tumbled by a remarkable 42 percent following the company’s Q3 report. The massive selloff eradicated nearly $20 billion in overall value. Since the the stock has lost another 15% in value. However, following this shock, many investors are wondering whether DocuSign could now be undervalued. Here’s what you need to know about DocuSign and whether it’s a bargain in today’s market.

The Bullish Case for DocuSign

Surprisingly in light of the market reaction, DocuSign’s recent Q3 earnings call gave investors several reasons for optimism. Total revenue grew by 42 percent, reaching $545 million. Revenue from international services grew by 68 percent year-over-year in Q3 and accounted for 23 percent of all revenues.

International opportunities are expected to propel ongoing growth as DocuSign markets its services to businesses and consumers around the globe. However, perhaps the most important data to come out of the earnings call were those relating to the company’s margins. The operating margin rose to 22 percent in Q3, up from just 13 percent a year earlier. Non-GAAP gross margin rose to 82 percent from 79 percent. These higher margins speak well to DocuSign’s ability to profit from its business model. Gross margin across the tech sector averages about 55 percent, making DocuSign a standout in profitability metrics.

A key component of the DocuSign business model, subscription revenues, were also up markedly from the previous year. Subscription revenue grew by 44 percent, slightly faster than overall revenue growth. The company’s projections show slowing but strong subscription growth going into Q4. In this quarter, revenue from subscriptions is expected to grow by approximately 33 percent.

Another relatively strong argument for a bullish outlook on DocuSign is the recent rollout of its latest product, DocuSign Notary. This service makes it possible to have documents and agreements notarized remotely. The notary business today is still quite traditional, with most notarizations occurring in-person and the majority of forms being filled out manually. DocuSign has a genuine opportunity to disrupt and modernize this essential industry with its new service. Given that demand for notaries reached record levels last year, a successful entry into remote notarization would likely be quite lucrative for DocuSign going forward.

Finally, the selloff itself may represent a good reason for investors to buy DocuSign. Having lost such a substantial share of its former price, DocuSign is likely quite undervalued. A lower price could give risk-tolerant investors an entry point from which to realize more considerable gains if the company succeeds in the coming years.

According to analysts, fair market value sits closer to $200 per share.

Billings: The Fly In The Ointment

Despite a strong fundamental case for good value, DocuSign does have its pitfalls. The recent selloff largely stemmed from failure to meet billings guidance. While billings grew 28 percent to $565.2 million, the guidance for the quarter estimated billings of $585 million to $597 million.

Behind the billings problem was the trend for companies to conduct in-person business due to rising vaccination rates. As the pandemic winds down, DocuSign is almost sure to see a slowing of the explosive growth it experienced over the past two years.

It’s worth noting, though, that even DocuSign had anticipated an eventual return to more normal conditions. As discussed during the Q3 earnings call, that adjustment had simply taken place more quickly than the company expected.

Is DocuSign a Good Value Now?

Despite some mixed signals, DocuSign appears to be a good value for investors seeking a fast growing stock with long term potential. While the missed billings guidance certainly isn’t positive, it also didn’t justify the exaggerated selloff that occurred once Q3’s earnings report was released. Given that the billings miss was fairly narrow, the selloff seems to have been an overreaction.

This view is partially supported by a concurrent selloff among software companies on the same day as the DocuSign crash. Salesforce (NYSE:CRM) and Zscaler (NASDAQ:ZS) both headed sharply lower. While DocuSign was by far the most dramatic loser, these facts suggest that the market was already looking for any excuse to sell off software stocks. This instinct, when paired with the lackluster billings performance, likely accounts for the seemingly unjustified plunge in share prices.

In fact, contrary to fears that the worst was yet to come for the stock, investors have begun purchasing the deeply discounted shares. While the price remains significantly lower than before the Q3 report, there is little to suggest that further losses are in the offing. The lowest analyst price target for the stock in the coming 12 months is $170, with the average target price sitting at $260. The highest target price is $360, though this seems unlikely in light of recent events. At the very least the reward to risk ratio now favors the brave.

Overall, DocuSign is a company with high growth potential that is currently a very good value. Although there certainly are some risks associated with the company, it also has solid fundamentals and good opportunities for future growth. At present, DocuSign is a likely a bargain buy, particularly compared to other rapid growth stocks.