Is DocuSign Stock a Buy Now?

DocuSign's (DOCU 1.93%) stock surged 10.5% the day after the release of its fiscal 2023 second-quarter earnings report. For the period, which ended July 31, the e-signature service provider's revenue rose 22% year over year to $622.2 million, which exceeded analysts' estimates by $19.9 million, and its billings grew 9% to $647.7 million. Adjusted net income fell 8% to $90.1 million, or $0.44 per share, but still cleared the consensus forecast by $0.02 per share.

For the third quarter, DocuSign expects revenue to rise 14% to 15% year over year as billings increase 3% to 5%. For the year, it expects revenue to grow about 18% while billings increase 8% to 9%. Those estimates matched analysts' expectations, but they would also represent DocuSign's slowest top-line growth rates since it went public four years ago.

Image source: Getty Images.

DocuSign's stock is down by nearly 80% from the all-time high of $310.05 it touched last September, but it remains over 120% above its IPO price of $29. Is now the right time to buy this deflated growth stock?

Identifying the main headwinds

DocuSign has won approximately 70% of the e-signature market since its founding in 2003. It ended the second quarter with 1.28 million customers, up 22% year over year, and it already serves most of the largest financial, healthcare, and technology companies in the Fortune 500.

In addition to its core e-signature services, DocuSign also provides contract lifecycle management services for human resources departments. It bundles all those services together in its subscription-based DocuSign Agreement Cloud.

DocuSign initially grew like a weed as more companies digitized their businesses, eliminated paper-based contracts, and relied more heavily on hybrid and remote workers. Its growth accelerated significantly in fiscal 2021 (which ended in January 2021) as companies prioritized their digital transformations during the first year of the pandemic. However, DocuSign's growth cooled off in fiscal 2022 as vaccines arrived, lockdowns ended, and social-distancing efforts relaxed. Its business growth slowdown intensified throughout the first half of the current fiscal year.

Data source: DocuSign. *Based on the midpoint of company's full-year outlook.

Initially, bullish investors believed DocuSign's growth rates would stabilize once it lapped its tough comparisons from the earlier phases of the pandemic. Unfortunately, that thesis has been shattered by inflation, rising interest rates, geopolitical tensions, and other macroeconomic headwinds that have broadly disrupted enterprise spending over the past year. The abrupt resignation of DocuSign CEO Dan Springer in June also dashed hopes for a soft landing and a quick turnaround.

During the latest earnings call, interim CEO Maggie Wilderotter said the company was still experiencing "some softness in certain verticals, like real estate and financial services." That pressure reduced its dollar net retention rate to 110% from 114% in the previous quarter and 124% a year ago. That was notably below its historic range of 112% to 119%, and Wilderotter expects it to stay below that range in the current quarter.

Trying to stabilize margins

As DocuSign's top-line growth cools off and net retention rates weaken, it's focusing on stabilizing its gross and operating margins on a non-GAAP (generally accepted accounting principles) basis. It still expects them to decline from fiscal 2022, but they would still compare favorably to the previous three years.

Data source: DocuSign. Metrics are non-GAAP. *Based on the midpoint of company's full-year outlook.

That stable outlook indicates DocuSign still has plenty of pricing power in the e-signature services market and suggests that investors shouldn't worry too much about competing services like Adobe's Sign or Dropbox's HelloSign yet. 

However, DocuSign still isn't profitable on a GAAP basis, and its net loss more than doubled year over year from $33.9 million to $72.5 million in the first half of fiscal 2023. That was mainly due to stock-based compensation, which surged 39% year over year to $251.9 million (or 21% of DocuSign's total revenue) during that period.

DocuSign repurchased about $25 million in shares during the latest quarter, and it still has $175 million left under its current buyback authorization, but most of those buybacks were likely aimed at offsetting the dilution from stock-based compensation.

It's not a bargain yet

DocuSign's business is stable, but its billings growth is still decelerating, its net retention rates are slipping, and its GAAP losses are widening. Its stock doesn't seem too expensive at 35 times forward earnings and five times this year's sales, but there are plenty of better cloud-based software stocks that currently trade at similar valuations. Investors should keep an eye on DocuSign, but they shouldn't buy the stock until a few more green shoots appear.