Is DocuSign Stock a Buy Now?

DocuSign (DOCU -0.45%) stock plunged 23% during the after-hours session on June 9 following the release of its first-quarter earnings report. The e-signature and contract management services provider reported revenue growth of 25% year over year to $588.7 million, which beat analysts' expectations by $6.8 million.

However, its adjusted net income declined 16% to $77.5 million, or $0.38 per share, falling eight cents short of the analyst consensus. On a generally accepted accounting principles (GAAP) basis, its net loss more than tripled from $8.4 million to $27.4 million.

Image source: Getty Images.

Those headline numbers were messy, but DocuSign stock now trades nearly 80% below its all-time high from last September. Should investors start accumulating some shares of this fallen growth stock?

What does DocuSign do?

DocuSign has conquered about 70% of the e-signature market since its inception in 2003. It ended the first quarter of fiscal 2023 with 1.24 million customers, representing 25% growth from a year ago, and it already serves most of the Fortune 500's top financial, healthcare, and technology companies.

Its platform provides more than 350 prebuilt integrations with popular business apps. It bundles those tools with its contract management services in its subscription-based DocuSign Agreement Cloud. That sticky ecosystem has consistently expanded as more businesses have digitized their operations, eliminated paper-based contracts, and shifted toward remote and hybrid workflows.

DocuSign was growing at an impressive clip prior to the pandemic. However, its revenue and billings growth accelerated throughout fiscal 2020 and 2021 as the pandemic forced more people to work online.

Data source: DocuSign. YOY = year over year.

But those "hypergrowth" days are over

DocuSign's dazzling top-line growth initially impressed the bulls. But starting in the second half of fiscal 2022, DocuSign started to issue softer revenue guidance and warned it would face difficult year-over-year comparisons in a post-lockdown world throughout fiscal 2023.

For the current quarter, DocuSign expects revenue to rise 17% to 18% year over year, while billings increase just 1% to 2%. For the full year, management is guiding for revenue to grow 17% to 18% with billings up 5% to 6%.

During the conference call with investors, CFO Cynthia Gaylor said that while the company remained "confident" in its long-term prospects, it wasn't "immune to the macro challenges with our customers and peer space."

DocuSign also faces plenty of competition from other e-signature players like Adobe Sign and Dropbox's HelloSign. Adobe bundles Sign with its other Document Cloud services, and Dropbox integrates HelloSign into its cloud-based storage platform.

Simply put, DocuSign will have to manage post-lockdown comparisons, macroeconomic challenges, and competitive headwinds all at once this year. That relentless pressure has driven most of the bulls away.

Its operating margins are slipping

Over the past few years, DocuSign's non-GAAP gross margin consistently stayed around 80% as its operating margin expanded.

Data source: DocuSign.

To the bulls, that ongoing expansion meant DocuSign still wielded plenty of pricing power, and economies of scale were kicking in.

But in fiscal 2023, DocuSign expects its non-GAAP gross margin to dip to 79% to 81% and for its non-GAAP operating margin to slip to 16% to 18%, even though Gaylor said the company was already "moderating our expenses and managing our hiring plans at a more measured pace" for the full year. As a result, analysts expect DocuSign's adjusted earnings per share (EPS) to decline 1% for the full year.

Is DocuSign stock finally too cheap to ignore?

DocuSign's guidance might look fine for a mature tech stock, but the company was priced like a hypergrowth stock. When its stock price hit an all-time high of $314.76 last August, the company was valued at over $60 billion, or 35 times sales.

Since reaching that peak valuation, inflation, rising interest rates, and other macro headwinds have driven investors away from pricier growth stocks, especially those that aren't profitable. That's why DocuSign now trades at just six times sales.

That price-to-sales ratio looks a lot more reasonable. For reference, Adobe, which is firmly profitable and expected to generate 13% sales growth this year, trades at 12 times sales. Salesforce, a major DocuSign partner that expects to generate 20% sales growth this year, trades at six times sales as well.

In that light, DocuSign isn't a screaming bargain yet. Its business is growing, but its valuation could be compressed even further as investors fret over its near-term slowdown.