Let's be clear about one thing: Any stock that loses 80% of its value from its all-time high carries inherent risks. But that doesn't mean the company is uninvestable, especially given how broad the sell-off has been in the technology sector in 2022. In many cases, investor sentiment has turned so negative that the losses in some individual stocks might be overdone.
Affirm (AFRM 1.80%) and DocuSign (DOCU 0.12%) each have their own unique challenges, but they also face undeniable opportunities. Broader economic issues like high inflation and rising interest rates have slashed investors' patience for promising growth stories, but with those trends potentially reversing, there's a chance the second half of 2022 could bring better fortune to the two companies. Here's why.
The case for Affirm
Buy now, pay later (BNPL) is a twist on traditional installment-based lending that technology companies have developed to compete with credit cards. BNPL can offer lower interest rates, no additional fees, and a fully digital experience that integrates with a consumer's favorite online store so they don't need to worry about carrying a physical card.
Each year, about $10 trillion in payment volume is processed globally and Affirm estimates that BNPL is the fastest-growing segment. But if companies like Affirm want to gain further traction, they have to mount some difficult hurdles. Increased competition, potential regulation, and an inability to turn a profit are among them.
The latter is a key reason Affirm stock has declined 87% from its all-time high. The company operated at a loss of $431 million during fiscal 2021, and a loss of $521 million in the first nine months of fiscal 2022 (ended March 31). These losses are partly driven by its customers failing to repay loans. In Q3 of fiscal 2022, Affirm had an allowance for credit losses of over $159 million. Since BNPL is still a relatively young industry, it might take a few more years to fine-tune assessment models to weed out bad borrowers.
But unlike other BNPL providers, Affirm has signed blockbuster deals with e-commerce giants Amazon and Shopify. This allows customers to finance their purchases with BNPL at checkout, which could drive an unprecedented growth surge for Affirm. Its customer count is soaring already, with a 137% year-over-year jump in Q3 to 12.7 million, thanks in part to these deals.
If growth stocks come back into favor among investors, Affirm might be afforded the time it needs to get its financial house in order to stem losses and build a healthier business. Plus, if inflation and interest rates stop rapidly moving higher, that would boost consumer spending. A strong recovery in Affirm's stock price might then be in the cards.
The case for DocuSign
DocuSign is best known as a leader in digital signature technology, but its business has expanded well beyond that single innovation. The company's stock was a pandemic darling because its suite of digital document products shifted from a nice-to-have to a must-have for its customers, as travel ground to a halt and in-person meetings were put on hold.
It traded at $86 per share at the beginning of March 2020, and rocketed to an all-time high of $314 in 2021 as the pandemic progressed. But it has since completed a round trip (and then some), now trading at $63, or 80% below that lofty level. The question is whether the steep drop is warranted given the company's investments in future technologies, which could drive growth beyond the pandemic.
For example, its DocuSign agreement cloud platform serves as an end-to-end solution for negotiations in the digital age, providing the ability to create, analyze, and collaborate on contracts even if the parties are on opposite sides of the world. It incorporates artificial intelligence that is trained to spot problematic clauses to help legal teams move agreements along more quickly, and its capabilities are likely to only improve over time.
DocuSign serves over a billion users worldwide with 1.24 million paying customers. In fiscal 2022 (ended Jan. 31) the company generated $2.1 billion in revenue, which was a 45% increase from fiscal 2021. But its guidance suggests revenue will grow a more modest 17% to $2.4 billion in fiscal 2023, which is likely driven not only by fewer pandemic restrictions, but also the broader economic slowdown. It was off to a hot start in Q1, though, growing revenue by 25% year over year.
DocuSign would also be a highly profitable company on a generally accepted accounting principles (GAAP) basis if not for the amount it spends on stock-based compensation, which it's using to retain its talented employees amid a competitive labor market. It spent $409 million on that line item in fiscal 2022, which ate up the majority of its $411 million in net income (profit).
It's reasonable to expect DocuSign will become an increasingly utilized piece of the corporate toolbox as remote deal-making becomes more commonplace for its convenience. Its stock might be worth a bet at this heavily discounted price for long-term investors, especially if the broader market recovers on easing fears of high inflation.