2022 has been a lousy year to own tech stocks -- no doubt about it. Since the start of this year, the Nasdaq composite index has shed more than 30% of its value, meaning the Nasdaq is now in an undeniable bear market. (Technically speaking, you really only need a 20% decline to qualify as a bear market.)
And it gets worse.
The Nasdaq may be down 30%, but individual Nasdaq stocks have fallen much, much more. Case in point: E-signature company DocuSign (DOCU 1.02%) -- that's the one that lets you "e-sign" your contracts and mortgage paperwork online -- has crashed 62% since the year began. If tech stocks are in a bear market, DocuSign is in a double-bear market.
DOCU Total Return Price data by YCharts.
Opportunity knocks...
And yet, this could be great news for investors who've been waiting for a chance to buy DocuSign on the cheap. To find out why, let's take a look at the numbers.
Currently valued at $11.8 billion in market capitalization, DocuSign has no P/E ratio because according to generally accepted accounting principles (GAAP), the company has no "P" -- i.e., it's technically not "profitable." But in fact, DocuSign is a very profitable business, generating cash profits -- free cash flow -- of nearly $500 million over just the past year alone.
Furthermore, as DocuSign piles up cash, its enterprise value gets even cheaper. Subtracting net cash from market capitalization gives us an enterprise value of only $11.7 billion for DocuSign, and an enterprise value-to-free cash flow ratio of only 23.4. For a stock that analysts expect will grow its profits 16.5% annually over the next five years, that's not at all a high price, and not a bad valuation at all for an apparently "unprofitable" stock.
...and the CEO answers
It's not just me thinking that, by the way. Fact is, DocuSign's own CEO seems convinced that DocuSign's current share price of less than $60 is a screaming bargain, too. And we know this because, back in January 2022, as the tech sell-off was just getting underway, DocuSign CEO Daniel Springer laid out $2.4 million to buy DocuSign shares for his own account -- at share prices as high as $147.
As DocuSign shares continued to fall, Springer doubled his bet in March, spending another $5 million on DocuSign stock at prices as high as $76.45.
And now it's June, and DocuSign stock is down another 20% -- and selling for less than half what the CEO paid when he first went stock-shopping in January. (By the way, I kind of suspect that Springer is kicking himself for not waiting longer to begin his buying. At this point, he may even be a bit tapped for cash, and unable to buy much more.)
But that doesn't mean you can't. And in fact, I think now might be a great time to buy before DocuSign stocks soars again.
E-signatures are the future
Consider this: DocuSign stock is down hard since reporting earnings last week, but those earnings were anything but bad. Revenues grew 25% year over year, and if you assume (as I do) that as DocuSign grows, its profit margins will increase rather than decrease or hold steady, this suggests that over time, DocuSign's profits should grow faster than revenues -- and that the company will outperform analysts' predictions of only 16.5% earnings growth.
Indeed, if you look at the company's cash flow statement from last quarter, this is exactly what happened. Although DocuSign remained technically unprofitable, its free cash flow in the quarter grew 42%.
Right now, a lot of investors seem to be betting that DocuSign's growth was some kind of pandemic fluke -- and DocuSign's stock is suffering the consequences. But if you ask me, what the pandemic really taught us is that remote work can be just as efficient -- or more efficient -- than office work. As more business is conducted online, it just makes sense that e-signatures are the way most documents will be signed in the future.
As the market leader in e-signatures, with a 70% market share in the U.S., DocuSign seems to me the right way to play this trend. And if we can do that while also paying a bargain-basement price -- less than half what the CEO paid for DocuSign stock -- that's a deal I want to take.
