DocuSign's (DOCU -1.76%) stock plunged nearly 80% over the past 12 months. The e-signature services leader was once beloved by growth investors during the pandemic, but it quickly lost its luster in a post-lockdown world as its revenue growth cooled off and its losses widened.
At its all-time high of $310.05 last September, DocuSign's stock traded at 33 times the revenue it would generate in fiscal 2022, which ended this January. That nosebleed price-to-sales ratio was impossible to sustain as rising rates drove investors away from frothier growth stocks, but DocuSign's stock now looks significantly cheaper at less than five times this year's sales.
But before investors consider DocuSign to be a viable turnaround play, they should be aware of three red flags which indicate its sell-off isn't over yet.
Image source: Getty Images.
1. Dan Springer's abrupt departure
DocuSign's CEO Dan Springer, who was hired for the top job in 2017 and took the company public in 2018, recently stunned investors with his unexpected and immediate departure on June 21. Chairman Maggie Wilderotter immediately took over as the company's interim CEO.
DocuSign didn't provide any clear reasons for the CEO's leaving, but his exit raises a red flag because he personally bought a lot of shares over the past few months to express his confidence in DocuSign's long-term prospects.
Springer bought 33,675 shares of DocuSign for about $4.8 million in December, an additional 38,192 shares for $5 million this January, and 66,882 more shares for $5 million in March. He paid an average price of about $107 for all those shares -- which now trade at about $60.
Springer's poorly timed purchases, followed by a disappointing first-quarter report earlier this month and his surprise resignation, strongly suggest that he underestimated the near-term headwinds for DocuSign's business.
During DocuSign's latest conference call on June 9, Springer said he remained "confident" in its "strategy and path to becoming a $5 billion revenue company." But to reach that goal, DocuSign would need to double its annual revenues from its target of about $2.5 billion this year. It's unclear if Springer's full-time successor will reiterate that bullish long-term view.
2. Its insiders are heading for the exits
DocuSign's other insiders don't seem to share Springer's optimism. Over the past 12 months, its insiders dumped more than six times as many shares as they purchased -- even after factoring in Springer's big buys.
Over the past three months, insider sales have overwhelmed purchases. That glaring lack of consistent insider confidence indicates it's still too early to buy DocuSign's beaten-down shares, even as its forward price-to-sales ratio slips to more sustainable single-digit levels.
3. Adobe could be gaining ground
DocuSign controls about 70% of the global e-signature services market, but Adobe's (ADBE -0.27%) Sign remains a formidable competitor. Adobe directly integrates Sign into its Acrobat software, and it's tethered to its own enterprise-oriented cloud services and other third-party applications.
In its latest quarter, Adobe's Document Cloud revenues, which include Sign and Acrobat, rose 27% year over year to $595 million. DocuSign's total revenues only grew 25% year over year to $589 million in the first quarter of fiscal 2023, and it expects its full-year revenue to rise just 17% to 18%.
During Adobe's latest conference call, Digital Media President David Wadhwani said the integration of Sign into Acrobat "continues to drive strong demand for Adobe Sign as users increasingly send PDFs for signature directly from the unified Acrobat experience." CFO Dan Durn also said the company saw "strong adoption" of that combination "within organizations of all sizes."
Adobe didn't reveal any exact revenue or operating profit figures for Sign on a stand-alone basis, but it could continue to leverage its integration into Acrobat and other third-party services to chip away at DocuSign's market share.
DocuSign is still a risky investment
DocuSign's business isn't doomed, but its slowing growth and lack of profits on a GAAP (generally accepted accounting principles) basis make it a risky stock to own in this hostile market for growth stocks. The three other red flags I just mentioned make it an even less attractive investment.
