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A Month After the Crash, It's Time to Reevaluate DocuSign

By David Moadel – Jan 10, 2022 at 7:15AM

Key Points

  • DocuSign’s CEO acknowledged what everyone already suspected: The post-pandemic demand for e-signature services is slowing.
  • However, a business-model expansion could provide a powerful revenue stream for DocuSign.
  • Over time, DocuSign will have to demonstrate the viability of its new in-house investment vehicle.

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If DocuSign can evolve and adapt to changing e-signature market conditions, wary investors can sign on the dotted line.

Stocks that were made by COVID-19 will fade with the virus. That seems to be the prevailing explanation for why DocuSign (DOCU 3.11%) stock ascended quickly in 2020 but declined sharply in 2021.

The market can be fickle, but DocuSign must carry on its business irrespective of investor sentiment. Regaining stakeholders' confidence won't be easy, as the work-from-home trade already felt "so last year" last year.

Although a closer look at the financials will actually suggest that DocuSign might be on the path to profitability. Besides, a broader expansion into what the company calls the "future of agreements" indicates a much-needed diversification of DocuSign's revenue sources.

Person standing with a visual of a virtual grid noting a digital signature for a contract.

Image source: Getty Images.

Sign of the times

Just the price action of DocuSign stock is all the evidence an investor would need to show that the company went from market darling to distressed asset. Stunningly, the stock soared from $75 in early 2020 to a peak of $315 in mid-2021, only to plunge to $135 in November.

Was this an overcorrection, though? As fellow Motley Fool contributor Royston Yang put it, DocuSign "released a set of sparkling results for its fiscal 2021 third quarter," but investors dumped their shares anyway.

Indeed, there was some sparkle in the numbers:

  • 42% year-over-year revenue growth
  • 44% subscription revenue growth
  • Billings up 28%
  • 79% GAAP gross margin
  • Free cash flow of $90 million versus $38.1 in the year-earlier quarter

Yet DocuSign stock plunged 38.2% in December. Evidently, Wall Street wasn't particularly impressed with the company's fourth-quarter guidance, which called for $557 million to $563 million in revenue -- a modest increase over Q3's $545.5 million.

Can't subscribe to this

Apparently, Wall Street's expectations for DocuSign were so high that being good wasn't good enough. But sell-side traders might have missed out on some of the more encouraging data points.

In particular, DocuSign is moving quickly toward profitability. The company's net earnings loss shrank from $58.5 million in Q3 2020 to just $5.7 million in Q3 2021. Moreover, DocuSign's $170.9 million net loss from 2020's first nine months was reduced to $39.5 million in 2021's first nine months.

For the most part, those bottom-line improvements are due to revenue increases, not reductions in expenditures. What might be problematic for DocuSign, though, is the company's overreliance on a single revenue type. Out of Q3's $545.5 million in revenue, $528.5 million was subscription revenue (roughly 97%). A similarly lopsided ratio (also around 97%) can be identified throughout 2021's first nine months.

Subscriptions to DocuSign's software suite and access to customer support generally range from one to three years. There's a reasonable concern, then, that some clients won't re-up if the work-from-home trend subsides in the post-pandemic era.

Piloting into the agreement cloud

Thankfully, a new business extension could enable DocuSign to reduce its reliance on e-signature software-subscription renewals. With DocuSign Ventures, the company seeks to nurture entrepreneurs and start-ups that are "changing the future of how we all will agree." Thus, DocuSign could be morphing into a venture capitalist/angel investor in order to develop the "agreement cloud." Investing in digital disruptors can be a risky business, but at least DocuSign is diversifying and thereby preparing for a time when its core services are less relevant.

In its press release announcing Ventures, DocuSign teased investors with clues as to what types of businesses might be targeted for funding. These include digital payment platforms, artificial intelligence and smart contract technology, legal and compliance automation technologies, and even vertical solutions in areas such as mortgage and lending. Each of these areas could be bundled with DocuSign's existing e-signature solutions. So maybe Ventures isn't really venturing too far afield.

Picking up the pieces

Post-crash and post-pandemic crisis, DocuSign stock is cheaper and either more or less appealing, depending on one's viewpoint. The recently released fiscal figures weren't terrible, though DocuSign's focused business model is clearly exposed, as is the company since the subscription revenue could dry up over time.

However, DocuSign is apparently prepared to address this weakness through investments into promising and potentially transformative small businesses. Whether the "agreement cloud" is a worthy field for venture capital remains to be seen -- and DocuSign's shareholders will be watching closely, no doubt.

None of this amounts to anything that cautious investors can hang their hats on, unfortunately. Now more than ever -- and even at its drastically reduced price -- DocuSign stock remains speculative. It will likely be a plaything for traders with an appetite for risk and a penchant for technologies that aren't fully appreciated today but might be commonplace soon enough.

David Moadel has no position in any of the stocks mentioned. The Motley Fool owns and recommends DocuSign. The Motley Fool has a disclosure policy.

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