DocuSign (DOCU 5.84%) stock was a quintessential pandemic darling. It was trading at about $80 per share in March 2020 before soaring to an all-time high of $310, but it has since collapsed by 84%.
Why? DocuSign kept the business world moving while society was under COVID-19 restrictions. Thanks to its growing portfolio of cloud-based digital document technologies, the company reduced the need for in-person meetings.
But now that most restrictions have been relaxed, DocuSign's growth suffered an inevitable slowdown, pushing investors to exit its stock.
The company just reported its financial results for the third quarter of fiscal 2023 (ended Oct. 31) and they came in better than expected, which led to a 15% pop in DocuSign stock. Here's why it might be poised to soar in the new year.
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DocuSign has only tapped a fraction of its total opportunity
It's no secret more of the business world is shifting online, and the enabling technology is cloud computing. DocuSign has built a portfolio of tools under its Agreement Cloud banner that are designed to service the entire contract lifecycle from start to finish.
The platform facilitates the creation of agreements, and even helps in the negotiation process with advanced technology like artificial intelligence (AI). Its DocuSign Insight product uses AI to scan contracts for potentially problematic clauses and even possible opportunities, which slashes the workload for legal teams, and the subsequent cost.
From there, the Agreement Cloud allows for digital collaboration between the parties and, of course, enables signing with its market-leading e-signature tool.
DocuSign estimates that its total addressable market is worth $50 billion, and considering the company generated just $2.1 billion in revenue during fiscal 2022, it has only captured about 4% of that opportunity. Nonetheless, DocuSign has attracted over 1 billion users across 180 countries, and its paying customer base topped 1.3 million in the recent fiscal 2023 third quarter.
But the strongest demand for the company's platform appears to be coming from large organizations. The number of DocuSign customers with an annual contract value of $300,000 or more increased at a compound annual rate of 44% over the past 10 years, compared to just 39% for its total customer base.
DocuSign's revenue topped expectations
DocuSign's revenue growth has slowed from the lightning pace it achieved during the pandemic, but the resumption of normal social conditions isn't the only thing having an impact. The global economy is constrained by soaring inflation and rising interest rates at the moment, which is forcing both consumers and businesses to trim their spending.
Additionally, DocuSign's sales figures are simply much larger now than they were two years ago, making it difficult to generate comparable rates of growth.
The company delivered $645.5 million in revenue in Q3, representing a modest year-over-year increase of 18%. But that was significantly above its guidance of $628 million at the high end, which is one of the reasons investors sent DocuSign stock higher in response.
The positive result prompted the company to raise its full-year guidance for fiscal 2023, from $2.482 billion at the high end of the range to $2.497 billion. While the difference is relatively small, the revision suggests management is growing more optimistic about the business after a tumultuous year.
DocuSign's stock is the cheapest it has ever been
Despite generating more revenue than ever and having a larger customer base than it has ever had, DocuSign stock trades at a price-to-sales ratio of just 3.7 -- the cheapest level since it became a publicly traded company in 2018.
NASDAQ: DOCU
Key Data Points
Investors have shunned unprofitable companies this year amid the weakening economic environment because they're perceived as high risk. Unfortunately, DocuSign posted a net loss of $101 million during the first nine months of fiscal 2023, which is more than double its loss in the year-ago period. The culprits are higher sales and marketing costs, and research and development costs, both of which are geared toward producing growth.
The good news is that DocuSign has nearly $1 billion in cash, equivalents, and short-term investments on its balance sheet, so it has plenty of runway to continue investing in its business at the current loss rate. The company is restructuring right now to reduce its workforce and cut costs.
But when DocuSign adjusts its net loss (in other words, quotes its non-GAAP result) by eliminating one-off expenses and stock-based compensation, it actually generated a net income (profit) of $285 million in the first nine months of fiscal 2023. While that's not considered true profitability by investors, the company's gross profit margin of 83% indicates it could bring its GAAP bottom line into the black simply by trimming operating costs.
For now, it appears the worst of the slowdown might already be behind DocuSign given its Q3 revenue beat, and the increase in its full-year guidance. If that turns out to be the case, investors who bought the stock at current levels might be sitting on handsome rewards a year or two from now, especially once the economy has improved.
