Shares of digital signature company DocuSign (DOCU +4.79%) fell more than 26% the day after the company reported its fiscal 2023 first-quarter earnings. This is the most recent chapter in a rough 12 months that have seen the stock fall from a high of $315 to a low of $60.
However, as we have witnessed many times before, the market's initial reaction to a company's earnings is often overblown, making the results seem worse (or better) than they really are. So is that what happened with DocuSign? Let's take a closer look at the quarter to see if DocuSign might actually be a buy after this sell-off.
Decent but slowing growth
The headline growth numbers for fiscal 2023 first quarter were decent but nothing extraordinary. Revenue grew 25% year over year; billings increased 16%; and the quarter ended with 1.24 million customers, up 25%. Taken without context, there's nothing to be worried about here.
NASDAQ: DOCU
Key Data Points
However, all three of these metrics represented a deceleration from the growth the company reported in the last few quarters. For perspective, in the prior-year quarter, revenue growth was 58%; billings grew 54%; and customer growth came in at 50%.
To be fair, the last few years saw uneven growth as DocuSign heavily benefited from the world's reliance on digital signatures amid pandemic-related lockdowns, and it will probably take a few more quarters before we know what DocuSign's long-term growth numbers look like in "normal times." But any prolonged deceleration in growth is worth keeping an eye on.
Struggling with profitability
Much of the market's reaction is likely due to DocuSign missing earnings guidance. Analysts were expecting non-GAAP earnings per share (EPS) of $0.46, but the company only reported $0.38. GAAP loss per share for the quarter was $0.14, compared to the year-ago quarter's loss of $0.04.
One of the reasons DocuSign is not yet profitable on a GAAP basis is due to its stock-based compensation (SBC), which added $111 million of costs and expenses in the fiscal first quarter. Interestingly, management stated on the earnings call that employees are looking for guaranteed pay, rather than compensation that's tied to the performance of the stock. If this results in a shift away from SBC, that could be a positive for DocuSign's profitability.
Cash generation remains strong
One of the most encouraging signs for investors is DocuSign's cash generation. The company posted $196 million of operating cash flow and $175 million of free cash flow last quarter. These metrics were up from $136 million and $123 million, respectively, in the year-ago period. Additionally, the company ended the quarter with $1.1 billion in cash and investments on the balance sheet.
Cash generation is always important for a business, but this is even more important in today's macroeconomic environment. With interest rates expected to continue to rise as a way to fight inflation, debt is going to be more expensive. DocuSign's cash flows mean it will be able to fund its operations without seeking additional capital by issuing debt or equity.
There's one more point about cash generation that investors should keep an eye on. As mentioned above, a shift from stock-based compensation to cash compensation for its employees may help the profitability of the company, but it would also eat into DocuSign's cash reserves. That balance will be important to watch in the coming quarters too.
Shares are on sale, but are they a buy?
I truly believe DocuSign's quarter was not as bad as the market's reaction would indicate. If the company was trading for a high valuation heading into this report, the steep drop would make more sense. However, it would be difficult to say the stock was overvalued when it was trading for only eight times sales on the day before the earnings report.
I will be holding my shares for now to see if the decelerating growth is a short-term blip or a long-term trend. I'll also be interested in following how management's comments about SBC impact the company's financial performance over the coming quarters.
That said, DocuSign's current price-to-sales ratio is 5.5, and it's trading for 26 times free cash flow, both of which are at or near all-time lows. If you have had DocuSign on your watch list and believe in its market position, shares are about as cheap as they've ever been.
