DocuSign (DOCU 1.02%) reported the first-quarter fiscal year 2023 earnings on June 9. The international e-signature solutions provider disappointed investors with the results, and its stock has been down 36% since the announcement.
Given a stock price fall of that magnitude, bargain-shopping investors are asking if it's an excellent time to buy. Let's look at what went down during DocuSign's first quarter, weigh it against its longer-term prospects, and look at its valuation to determine if investors should buy now.
DocuSign delivers a disappointing outlook
In its first quarter, which ended on April 30, DocuSign reported revenue of $589 million. That was a 25% increase from the same quarter in the year prior. The growth rate was a considerable slowdown from the 57.9% revenue growth rate it reported in the year-ago quarter. Keep in mind, however, world economies were under stringent restrictions during the same time the previous year as vaccinations against COVID-19 were much lower.
Billings, which measures the dollar value of contracts signed with customers, increased by 16% in the quarter ended in April. When DocuSign enters into agreements with clients, those "billings" turn into revenue as customers use the services they agreed to purchase. This is similar to buying an annual magazine subscription. That purchase shows up as revenue incrementally for the company as you receive each monthly issue.
Here is perhaps where investors were most disappointed. When sharing its second-quarter outlook, management told investors to expect growth of just 1% to 2% for year-over-year billings. That means DocuSign has hit a bit of a roadblock in terms of growth in selling its services to customers. The company noted it is not immune to the macroeconomic challenges impacting businesses worldwide.
To make matters more complicated, businesses large and small are calling workers back to the office and conducting more of their day-to-day operations in person. This is a headwind for a company that sells e-signature solutions.
DocuSign's long-term prospects are intact
Longer-term, DocuSign's prospects are solid. The near term may be volatile while businesses recalibrate their operations as the pandemic evolves into a less restrictive phase. E-signature solutions save time and money for companies and clients. Consider the time it takes for a client to visit a business's offices, find parking, meet with a representative, and proceed to sign documents. The client would most likely prefer to sign the documents electronically in the comfort of their own home.
From the business's perspective, it reduces the need for a representative to spend time with a client guiding the signing process. Further, it removes a high-friction point where many sales are lost. I know a few salespeople who have told me they had clients on the hook for a sale but lost them when they were told they needed to come to the office to sign documents.
Documents are also more easily searchable if you have them stored digitally, as DocuSign offers. Finally, there are the non-negligible costs of paper, ink, and storage. Those costs can add up considerably over the long term.
DOCU Revenue (Annual) data by YCharts
Overall, these advantages will likely fuel DocuSign's growth for several years. Indeed, management is confident it can grow to a $5 billion annual revenue business (its fiscal 2022 revenue was $2.1 billion). As more companies choose DocuSign, the physical environment could improve; fewer trees need to be chopped down to feed printers.
DocuSign's stock is inexpensive
DOCU Price to Free Cash Flow data by YCharts
The sell-off in DocuSign's stock has it trading at a price-to-free-cash-flow ratio of 26, which is as cheap as it has ever been. Of course, the slowdown in billings could eventually impact cash flows, but the dramatic price decrease has arguably more than priced in the potentially harmful outcome.
The answer is yes for investors who were curious if they should buy DocuSign stock. DocuSign has excellent long-term prospects and is selling at its cheapest valuation ever.
