The world is becoming more and more digital, there's no denying that. For investors, the question is how best to capitalize on that trend. One way to start is by identifying businesses that are disrupting their industries and niches by bringing them into the digital age.
DocuSign (DOCU 0.42%) is one such company. But after a wild ride in 2021 that saw the stock end the year down 51% from its peak, it would be understandable if investors were to shy away from DocuSign as an investment in 2022. It would also be a mistake.
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Consistent growth
The simplest description of DocuSign is that the company helps people create official digital signatures for documents. Without digging any further, one might assume the pandemic was a huge tailwind, as people needed to remain socially distanced, but still needed to conduct business. While that was true to an extent, the truth is that DocuSign was on a steady growth path well before COVID-19 arrived on the scene, and that trajectory remains intact today.
In its fiscal 2022 third quarter (which ended Oct. 31), DocuSign's year-over-year revenue growth was 42%. This was a continuation of a trend. Its revenue has increased sequentially in every quarter since the beginning of 2019, and it has produced year-over-year revenue growth of between 37% and 58% over that same timeframe. Gross margin was 79% compared to 74% in the year-ago quarter, and its net loss shrank from $58 million in fiscal Q3 2021 to a loss of $6 million in fiscal Q3 2022. In sum, both its top and bottom lines have been steadily improving for more than two years.
Growing the customer count
At the end of its fiscal Q3, DocuSign had 1.1 million customers, compared to 820,000 at the end of the prior-year period, a 34% increase. The number of enterprise and commercial customers grew by 45% year over year. Investors may have reacted negatively to these numbers when they were released because they marked a deceleration in growth compared to recent quarters. However, that should not have been unexpected, given that some of its growth was pulled forward as customers adopted DocuSign's services out of necessity during the earlier phases of the pandemic. Taking the long view, its customer growth remains healthy, and ahead of its pre-pandemic pace.
Driving future growth
One of the more compelling reasons to invest in DocuSign is its Agreement Cloud software, which the company describes as a product for automating and connecting an entire agreement process. Most notably, the artificial intelligence features can save several hours of work for its customers. One such feature can analyze a collection of agreements for risks and opportunities. Specifically, the software can search agreements for specific language or clauses, highlighting the more important aspects, and reducing the time and expense involved in sifting through dense legal documents. In its last 10-K, the company stated that its Agreement Cloud service has more than 890,000 customers and hundreds of millions of users.
Keeping an eye on slowing growth
No investment is free of risk, and it is true that DocuSign's revenue and customer growth rates have slowed sequentially over the last few quarters. Investors will be looking to see if that trend continues when the company reports earnings again. If that prospect is weighing on your decision about whether or not to buy this stock, though, after its recent sell-off, you should have some time to wait and see before the valuation rebounds. That said, for new or existing shareholders, I think the current price offers an attractive opportunity to buy DocuSign shares. At the time of this writing, it trades for only 11 times forward sales, a low it hadn't touched since the spring of 2020. There's plenty of upside ahead for the stock, and it no longer carries the risk of stretched valuation. In my opinion, DocuSign is a buy in 2022.
