Shares of DocuSign (DOCU -0.81%), the e-signature company that roughly tripled in value over the course of the pandemic -- only to fall 58% over the past 12 months -- tumbled once again in early Tuesday trading. As of 10:45 a.m. ET, DocuSign stock is down 3%. And you can thank Wedbush Securities for that.
Wedbush's thesis isn't shocking: DocuSign enjoyed a boom in business during the work-from-home phase of the pandemic, with sales growing 49% in 2020 and another 45% in 2021. But while Wedbush expects DocuSign to continue growing in the future, the analyst believes that the period of pandemic-driven hypergrowth is now over for DocuSign -- and it's time to sell.
Assume Wedbush is right and DocuSign can't count on hypergrowth anymore. How fast does the company need to grow to simply be worth what it's selling for today? And how fast must DocuSign grow to be cheap?
According to S&P Global Market Intelligence data, DocuSign generated positive free cash flow of $445 million last year. Based on a $16.9 billion market capitalization and with only a bit of net debt (about $80 million, or enough to put DocuSign's enterprise value at a nice, round $17 billion), DocuSign stock appears to be valued at an enterprise value roughly 38 times its free cash flow today.
At this valuation, I'd ordinarily want to see DocuSign growing at 38% annually over a five-year stretch to consider the stock a "bargain" -- but the S&P Global Market data shows analysts forecasting only 22% compound annual free-cash-flow growth. For this reason, I'm basically in agreement with Wedbush that DocuSign stock is not yet cheap enough to buy.
What happens if DocuSign turns out to be able to grow faster than 22%? In that case, I'm like Keynes: When the facts change, I'll be happy to change my opinion, too. Ask again when they do.