The pandemic has been a trying time for many companies, particularly during the height of social restrictions in 2020 and 2021. But on the flip side, it was the strongest period ever for a cohort of technology organizations that helped to keep the economy moving even as conducting business in person was hampered.
DocuSign (DOCU -3.79%) is one of those companies. Yet as widespread vaccinations rolled out and businesses have largely reopened, the company has struggled to maintain its lofty growth rates this year. As a result, investors have sent DocuSign stock plunging 81% from its all-time high.
The company just reported its financial results for the second quarter of fiscal 2023 (ended July 31), and not only did it show a healthy jump in sales, but DocuSign also expressed renewed enthusiasm by increasing its full-year guidance. The stock soared 18% in after-hours trading following the release, but should investors rush in to buy it now?
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DocuSign has become more than a digital signature company
DocuSign's electronic signature technology is used by over 1 billion people worldwide, making it the leader in that space. It was a game changer for businesses during the pandemic because it wasn't always possible to get pen to paper amid the travel restrictions. But a wave of competition has flooded the industry and, even though DocuSign remains popular, it has expanded its offering to remain one step ahead.
It's now better described as a digital document company. Its Agreement Cloud platform is home to over a dozen different applications and integrates with more than 400 third-party platforms to make exchanging and negotiating contracts seamless. Now, organizations can use the Agreement Cloud to generate new contracts, sign and notarize them, and even leverage artificial intelligence through DocuSign Insight to scan them for potentially problematic clauses.
Insight isn't advanced enough to do the work of a real legal team (yet), but it can certainly speed up workflows for organizations that receive and issue a large volume of paperwork. Plus, as is the nature of artificial intelligence, it will learn over time and improve.
Since DocuSign delivers all of this technology in the cloud, it means customers and counter parties can access their agreements anywhere, anytime. Mailing documents and chasing down physical signatures might be a thing of the past thanks to this company, which is why it's likely to continue growing steadily even after the pandemic officially ends.
DocuSign beat analysts' expectations in the second quarter
DocuSign's revenue continues to trend upward each quarter, which is great, but since the beginning of last year, the pace of growth has rapidly declined.
The 22% revenue growth rate in the recent second quarter might look daunting compared to the numbers that came before it, but there is a silver lining: Analysts expected DocuSign's sales to come in at $602 million for the quarter, which would've represented growth of just 17% year over year.
In simple terms, investors sent DocuSign stock soaring after it released its second-quarter financials because it handily beat analysts' estimates, suggesting the company might actually be close to a leveling off point with respect to its declining growth rates. DocuSign marginally increased its full-year guidance, further reinforcing investors' optimism. It now expects billings to come in at $2.57 billion (at the upper end) for fiscal 2023, compared to the $2.54 billion it projected last quarter.
DocuSign has work to do at the bottom line
Despite the somewhat rosy second quarter, DocuSign's net loss under generally accepted accounting principles (GAAP) still grew by 76% to $45 million compared to the year-ago period. The company did generate $112 million in net income (profit) on an adjusted basis, which excludes one-off costs and stock-based compensation, and this has been a trend for quite some time.
DocuSign invests heavily in remunerating its staff given the competitive environment for talent in the technology sector. In the second quarter, it awarded employees $141.2 million worth of DocuSign shares, and this has become more dilutive to investors over the past year because the value of those shares has dropped so steeply.
The current stock market environment hasn't been friendly to companies that aren't generating GAAP profitability. The good news is, DocuSign maintains a very high gross profit margin of 78%, so as long as its revenue continues to grow steadily, it should eventually pull its bottom line into the black by all measures.
Should investors jump into DocuSign stock now, especially after its post-earnings bounce? If they're looking for gains over the short term to the medium term, this might not be the best time to buy. But for those focused on the next decade, it's likely DocuSign stock will trend much higher given its innovative product suite designed for conducting business in the modern world.
