Smart investors typically have an excellent idea of the critical factors moving a company's stock price. They may not know everything about the business and its operations, but that might be because they prefer to have a deeper understanding of critical items that affect revenue, profits, and cash flow.
Investors focused on DocuSign (DOCU 0.09%) probably know these three things about the company: It was a big winner during the pandemic, it has a substantially positive planetary impact, and it is investing for growth. What follows is a deeper look into each of these three things that smart investors are paying attention to.
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1. DocuSign is benefitting from a pandemic tailwind
It's no surprise that DocuSign would benefit from a pandemic. The company offers digital solutions for businesses and institutions that need to get documents signed. Before the outbreak, a meaningful portion of document signings occurred with all parties physically present. Without a digital alternative, completing agreements could have suffered a significant slowdown while folks were worried about contracting a potentially deadly virus. DocuSign offered a seamless solution.
As a result, revenue and customer adoption surged for DocuSign. For fiscal year 2021 (ended Jan. 31, 2021), revenue increased to $1.5 billion, up 49% from the year before. The momentum continued in fiscal 2022 (ended Jan. 31), with revenue rising to $2.1 billion, a 45% increase.
Unfortunately for shareholders, management expects this momentum to slow down in fiscal 2023 as economies reopen and folks return to the office. Indeed, DocuSign's revenue forecast for fiscal 2023 calls for revenue to grow by just 17.5% at the midpoint.
2. DocuSign is having a positive planetary impact
DocuSign's core business has a meaningfully positive impact on the planet. The company aims to reduce paper use in preparing and signing agreements between individuals, organizations, and institutions. For those reading that have purchased a home and taken on a mortgage, you have an idea of the quantity of paper used in agreements. Now multiply that throughout a neighborhood, city, and country.
According to DocuSign, its services have helped save 55 billion pieces of paper and 6 million trees.
3. DocuSign is investing in growth
Because of the company's success before and during the pandemic, management is confident in its customer value proposition. It feels that if more businesses and institutions know about the benefits of adopting DocuSign's solutions for preparing, signing, and storing agreements, it will boost sales substantially. As a result, DocuSign is investing heavily in growth.
The company's most significant expense is sales and marketing. In fiscal 2020, it invested $591 million in the category. In fiscal 2021, that increased to $799 million, and in fiscal 2022 to $1.1 billion. This includes expanding headcount, boosting sales commissions, and marketing expenses on advertising platforms. That said, DocuSign is managing this investment responsibly. Sales and marketing expenses as a percentage of revenue decreased year over year.
Investor takeaway
The market has been most focused on DocuSign's decelerating growth coming out of the worst parts of the pandemic. The stock price is down about 65% off its 52-week high, and it is now trading at a price-to-free-cash-flow ratio of 49. That's near the lowest price-to-free-cash-flow ratio the company has sold for in five years, and you better believe savvy investors are keeping an eye on that exciting fact.
