DocuSign's (DOCU 1.02%) stock plunged 20% on March 11 after the e-signature and contract management services provider posted its fourth-quarter earnings report.
Revenue rose 35% year over year to $580.8 million, which beat analysts' expectations by $19 million. Adjusted net income grew 28% to $99.9 million, or $0.48 per share, which matched the consensus forecast.
DocuSign's headline numbers were decent, but it also expects a significant slowdown in fiscal 2023. So is it too late to buy this stock, which has lost roughly three-quarters of its value after hitting an all-time high last August?
Image source: Getty Images.
DocuSign's post-lockdown slowdown
DocuSign controls about 70% of the e-signature market. It serves roughly 1.2 million paying customers worldwide -- including most of the Fortune 500's largest financial, healthcare, and technology companies -- and over a billion people have used its services. It has also added contract lifecycle management services to its ecosystem, and it now bundles everything together in its subscription-based DocuSign Agreement Cloud platform.
DocuSign's early-mover advantage in this space enabled it to benefit from the modernization of businesses, the rise of paperless offices, and the shift toward remote and hybrid work.
The company's growth accelerated significantly in fiscal 2020 and fiscal 2021 (which ended last Jan. 31, 2021) as the pandemic forced more people to work remotely. But in fiscal 2022, its growth cooled off as lockdown measures were relaxed and more people physically returned to their offices.
|
Growth (YOY) |
FY 2019 |
FY 2020 |
FY 2021 |
FY 2022 |
|---|---|---|---|---|
|
Revenue |
35% |
39% |
49% |
45% |
|
Billings |
34% |
38% |
56% |
37% |
Data source: DocuSign. YOY = year over year.
DocuSign's long-term growth rates still look impressive. However, it expects its revenue to rise 23%-24% year over year in the first quarter of fiscal 2023, and to increase just 17%-18% for the full year.
During its earnings conference call, CFO Cynthia Gaylor attributed that slowdown to the "lingering effects tapering from the heightened demand we saw a year ago." She said the company would experience a "slower start to fiscal 2023 while we progress our go-to-market initiatives over the next few quarters."
DocuSign ended the fourth quarter with a dollar-based net retention rate of 119%, compared to 121% in the third quarter and 123% in the prior-year quarter. That metric -- which gauges revenue growth per existing customer -- is healthy as long as it remains above 100%, but the slight decline still raises a red flag for near-term growth.
Stable (but peaking) margins
DocuSign's gross and operating margins both expanded in fiscal 2022 on a non-generally accepted accounting principles (GAAP) basis.
|
Metric (Non-GAAP) |
FY 2019 |
FY 2020 |
FY 2021 |
FY 2022 |
|---|---|---|---|---|
|
Gross margin |
80% |
79% |
79% |
82% |
|
Operating margin |
2% |
5% |
12% |
20% |
Data source: DocuSign. YOY = year over year.
The company's gross margin expansion suggests it still has plenty of pricing power against the e-signature underdogs, which include Adobe Sign and Dropbox's HelloSign. Its rising operating margins also indicate it's exercising tighter financial discipline -- even as it ramps up its hiring and expands overseas.
But in fiscal 2023, DocuSign expects a non-GAAP gross margin of 79% to 81% and a non-GAAP operating margin of 16% to 18%. That slight contraction, which suggests its margins peaked in 2022, reflects the ongoing expansion of its Agreement Cloud and its investments in higher-growth overseas markets.
DocuSign faces a near-term slowdown, but it believes it still has plenty of room to grow. During the call, CEO Dan Springer said that with about $2 billion in annual revenue, DocuSign was still "very early in the first 10%" of the $50 billion global market opportunity for its Agreement Cloud services.
But is it too late to buy DocuSign?
When DocuSign's stock hit its all-time high last August, the growing company was valued at $60 billion, or nearly 30 times its fiscal 2022 sales. Today, it's valued at $15 billion, or just six times its fiscal 2023 sales.
That makes it cheaper than Adobe, which is expected to generate 14% sales growth this year but trades at 11 times that estimate. Dropbox trades at just three times this year's sales, but it's expected to grow at a much slower rate than DocuSign or Adobe for the next two years.
Simply put, I don't think it's too late to buy DocuSign. The business is growing, it's well ahead of its competitors, and it will still benefit from digital transformations across multiple industries. The stock could remain volatile in this challenging market, but its downside potential should be limited at these prices.
