1 Billion Reasons To Buy This Industry Leader

The day after releasing its fiscal 2023 second-quarter earnings report, DocuSign (DOCU) stock rose over 10%. Investors liked what they saw as the cloud-based e-signature leader beat Wall Street’s expectations, but there are still some major red flags.

Is now the time to buy into this leading e-signature company?

Reviewing the numbers

DocuSign helps organizations automate how they sign and prepare agreements. The company’s a leader in e-signatures, which reduce the friction of signing agreements by pen. Its technology is valuable in today’s business world — but what about its stock?

Investors responded well to the company’s recent earnings report; revenue soared by 22% year-over-year to $622.2 million. This figure exceeded analysts’ estimates by $19.9 million. Heading into the third quarter, DocuSign expects revenues to rise by 14%-15% year-over-year.

Other second-quarter financial highlights include:

• Billings hit $647.7 million, an increase of 9% year-over-year.
• Subscription revenue was $605.2 million, an increase of 23% year-over-year.
• Cash, cash equivalents, restricted cash, and investments were $1.12 billion at the end of the quarter.
• Adjusted net income fell 8% to $90.1 million, or $0.44 per share (it cleared the consensus forecast by $0.02 per share).

Maggie Wilderotter, DocuSign’s Interim CEO and Board Chair said, “We have a $50 billion market opportunity, an industry-leading digital agreement platform, a strong market position, and an experienced leadership team. I have total confidence our team will successfully deliver for all stakeholders.”

What are the red flags?

There is no denying that DocuSign is the leading e-signature service provider. Since its founding in 2003, the company has won approximately 70% of the e-signature market.

By the end of Q2 2023, the company had 1.28 million customers, up 22% year-over-year. Of these customers, DocuSign serves some of the largest Fortune 500 companies across the healthcare, technology, and financial sectors.

However, growth has slowed down recently. When the pandemic hit, companies began to prioritize digital transformation, and DocuSign benefited. But business growth slowed as social distancing measures were relaxed and lockdowns ended. Rising interest rates, inflation, and other macroeconomic headwinds are now standing in the way of stabilized growth rates.

DocuSign’s CEO, Dan Springer, also unexpectedly resigned in June, and DocuSign is facing competition with Adobe’s Sign. These issues make DocuSign a risky bet in a hostile market for growth stocks.

DocuSign is focusing on its margins

Top-line growth is cooling, which is why the company is focusing on its gross and operating margins on a non-GAAP basis. DocuSign isn’t yet profitable on a GAAP basis, and its net loss has more than doubled year-over-year. These losses were largely attributed to surging stock-based compensation.

The company plans to cut costs and reduce spending to improve its operating margin sequentially, but only time will tell whether these initiatives will be effective in winning over Wall Street.

DocuSign is one of the COVID-fueled businesses, alongside Peloton and Zoom that will need to reinvent itself to ignite another wave of buying. It has the fire power to do so. DocuSign could deploy some of its approximately $1.1 billion in cash and short-term investments on its balance sheet to move more aggressively into strategic acquisitions.

Is now the time to buy shares of DOCU?

Last September, DocuSign’s stock reached an all-time high of $310.05 per share. However, shares have since plummeted, dropping nearly 80%. This decline has left many investors wondering if now is the time to buy DOCU shares.

DocuSign is used by over 1 billion people worldwide, and its technology saves businesses and consumers time and money. Over the long term, the current price of DOCU shares may present a bargain buy, especially if the company comes up with new, innovative products over the next decade.

Even at current levels, our analysis of cash flows suggests Docusign has upside of 27.2% to $70.67 per share. That’s a compelling upside for a company that is forecast to 2x revenues over the next 5 years, turn profitable, and report $1 billion in EBITDA by 2027.