DocuSign's (DOCU 0.55%) stock rallied 12% on Dec. 9 after the e-signature services provider posted its latest earnings report. For the third quarter of fiscal 2023, which ended on Oct. 31, its revenue rose 18% year over year to $645.5 million and beat analysts' estimates by $18.3 million. Its billings increased 17% to $659.4 million. Its adjusted net income dipped 2% to $118.2 million, or $0.57 per share, but still cleared the consensus forecast by $0.15.

For the fourth quarter, DocuSign expects its revenue to rise 10% year over year and for its billings to increase 5%-7%. For the full year, it expects its revenue to grow 19% and for its billings to climb 9%-10%. Both full-year estimates were raised from its previous guidance in September, but they would still represent its slowest growth rates since its IPO four years ago.

A person digitally signs a tablet.

Image source: Getty Images.

DocuSign's slowdown might disappoint growth-oriented investors, but its stock has already declined nearly 70% this year. Will this out-of-favor tech stock bounce back over the next 12 months, or will it drop even further?

What happened to DocuSign?

DocuSign controls roughly 70% of the e-signature market, and it serves most of the largest financial, healthcare, and technology companies in the Fortune 500. It served 1.32 million customers in the third quarter, which represents 3% sequential growth and 19% growth from a year earlier. The company bundles its e-signature services with other contract lifecycle management services for HR departments in its subscription-based DocuSign Agreement Cloud. It generated 97% of its revenue from those sticky subscriptions in the third quarter.

DocuSign experienced accelerating growth throughout the pandemic, which covered most of fiscal 2020 and fiscal 2021, as more companies transitioned toward hybrid and remote work. The crisis also prompted many companies to accelerate their digital transformations and eliminate paper-based contracts. But as the following table illustrates, DocuSign's revenue and billings growth cooled off significantly over the past two years.

Metric

FY 2019

FY 2020

FY 2021

FY 2022

FY 2023*

Revenue growth

35%

39%

49%

45%

19%

Billings growth

34%

38%

56%

37%

9%-10%

Data source: DocuSign. *Company's latest expectations.

DocuSign's deceleration in fiscal 2022 wasn't surprising, since it faced tough year-over-year comparisons as the pandemic-induced tailwinds dissipated. But throughout fiscal 2023, it grappled with inflation, rising interest rates, geopolitical tensions, and other macroeconomic headwinds that disrupted enterprise spending. Those challenges, along with the abrupt resignation of CEO Dan Springer this June, caused many growth-oriented investors to abandon DocuSign. Its insiders also sold more than four times as many shares as they bought over the past 12 months as its stock price plummeted.

Another issue is DocuSign's lack of profits on a generally accepted accounting principles (GAAP) basis. It narrowed its GAAP net loss from $243 million in fiscal 2021 to $70 million in fiscal 2022, but its net loss widened to $102 million in the first nine months of fiscal 2023. Those steep losses, which can be partly attributed to the stock-based compensation expenses that consumed 21% of its revenue in the first nine months, made it a shaky investment as interest rates continued to rise.

DocuSign ended the third quarter with $633 million in cash and equivalents, but its high debt-to-equity ratio of 4.8 doesn't give it too much room to raise fresh cash at reasonable rates in this tough market.

Could DocuSign's prospects improve next year?

DocuSign's weaknesses are easy to spot, but it also has plenty of strengths. Its adjusted gross margin has hovered around 80% ever since its IPO, and it expects that metric to hold steady at 81%-82% in fiscal 2023. That stability indicates it still has plenty of pricing power against smaller competitors like Adobe Sign.

Its adjusted operating margin also expanded from just 2% back in fiscal 2019 to 20% in fiscal 2022. It expects that figure to also hold steady at 18%-20% in fiscal 2023, which indicates that economies of scale are kicking in. It also suggests that DocuSign can eventually achieve GAAP profitability once it reins in its stock-based compensation expenses.

DocuSign's stock also looks a lot more reasonably valued than it did last year. At its all-time high of $310.05 last September, it was valued at $61 billion -- or a whopping 24 times the revenue it expects to generate in fiscal 2023. Today, it's valued at $9.9 billion -- or less than four times next year's sales.

DocuSign didn't provide any precise guidance on fiscal 2024. But during the latest conference call, its new CEO Allan Thygesen said he "didn't join to run a low or mid-single-digit revenue company." Instead, Thygesen expressed confidence that DocuSign's international expansion and new product launches would continue to drive its near-term growth.

For now, analysts expect DocuSign's revenue and adjusted earnings to rise 9% and 14%, respectively, next year. Those growth rates look stable, but they probably won't light a fire under this beaten-down stock. Therefore, I believe DocuSign should hold steady -- but won't blast off -- over the next 12 months.