DocuSign (DOCU -2.35%) shares have been in deep water since the end of 2021. The company provided forward guidance in its third quarter earnings call that discouraged investors, mildly speaking. Following the announcement, DocuSign shares crashed over 40% over a two day span, and the stock has since declined further. A combination of a negative earnings report and macroeconomic headwinds adversely affecting high growth tech stocks as a whole has left DocuSign's stock down 63% in the past six months.
The recent sell-off in DocuSign shares has left many investors wondering if the stock is an attractive investment opportunity in today's market. Daniel Springer, the company's CEO, bought $2.4 million worth of DocuSign stock in January, a potential signal to investors that the business is undervalued. There are several elements that investors should consider before pulling the trigger on DocuSign. With that in mind, let's dive into the good -- and not so good -- aspects of DocuSign's business today.
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Where DocuSign has thrived
According to Allied Market Research, the global digital signature market is set to grow at a compound annual growth rate (CAGR) of 33%, up to $62 billion, by 2030. Fortunately for DocuSign, the company's 60% market share comfortably leads the industry. If DocuSign can maintain just 15% of the market in 2030, the company would generate an annual revenue of $9.3 billion, translating to an average annualized growth of 20% from 2021. We are still in the early innings of what is a massive secular growth trend, and DocuSign is well-positioned to lead the way.
Pandemic-driven demand led to strong financial performance in recent years for the e-signature juggernaut. Over the past three years, DocuSign enjoyed a revenue CAGR of 41%. In its most recent quarter, the company's top-line and non-GAAP (generally accepted accounting principles) earnings per share grew 42% and 164% up to $545.5 million and $0.58, respectively. This is extremely impressive growth, but I'm not convinced that it will continue in future years. As the secular growth industry plays out, investors should be aware of DocuSign's downside before naively buying the stock.
What to be concerned about
While DocuSign has made great strides in past years, the company poses several inherent risks to investors. At the outset, the company has not generated a positive GAAP net income despite providing us with positive adjusted (Non-GAAP) earnings. Non-GAAP earnings are commonly used by investors because they exclude "one-time" transactions, whereas GAAP earnings show the realized bottom-line a business actually receives. DocuSign isn't expected to achieve a positive GAAP net income until its fiscal year 2024, so the company still carries the risk of not becoming profitable. DocuSign shares could face significant downward pressure if the business shows any signs of an unclear path to profitability in future quarters.
Growth has been robust, but it will likely unwind in the coming years. Wall Street analysts are forecasting revenue to reach $4.7 billion by 2026, representing an average annualized growth of 19% from 2022 consensus estimates. This level of forward growth is nothing to be ashamed of, but it doesn't compare to DocuSign's previous five-year revenue CAGR of 42%. Similarly, analysts are calling for an earnings per share of $4.47 in fiscal year 2026, or an average annualized growth of 18% from 2022 forecasts.
With decelerating growth in mind, I don't think DocuSign currently possesses an alluring valuation. The company is trading at 62 times non-GAAP earnings and carries a non-GAAP forward PEG multiple of 1.26, which tells me that the stock is still expensive when examining forward growth. And compared to Adobe, which DocuSign lists as its primary competitor in its 10-K report, DocuSign is trading at a lofty price-to-earnings multiple. Today, Adobe (ADBE -1.73%) is trading at 38 times non-GAAP earnings, nearly two times lower than DocuSign. Just because we've seen a steep drop in DocuSign's market value doesn't mean the stock is at bargain levels. I'd need to see DocuSign's share price fall even further before starting a position in the stock.
Would I buy DocuSign today?
Although DocuSign has become increasingly enticing as the stock continues to fall, I think there are more actionable opportunities elsewhere today. Despite sitting at the forefront of a major secular growth trend, I'm still unmoved by the company's diminishing forward growth and not-yet-optimal valuation. DocuSign was once a substantially overvalued stock-the recent sell-off only makes the company less expensive than before, but not quite yet cheap. This is a business to keep on your radar in the coming quarters, but it wouldn't be unwise to remain on the sidelines for now.
