If you own DocuSign (DOCU -2.05%) shares, like myself, you've had a rough 2021 and 2022. Shares are off 85% from their all-time high and down 70% this year alone. To make matters worse, the stock is down around 40% from February 2020, before the pandemic started.
But a solid earnings report was announced on Dec. 8, and the stock shot up more than 10% the next day. That's still not nearly enough to offset the losses over the past two years. So is this just a case of the market taking pity on a company? Or is this the beginning of a turnaround? Let's find out.
The buy case: DocuSign's stock is cheap, and the company recently beat expectations
DocuSign's product allows clients or businesses to sign binding contracts digitally, which was immensely popular during the pandemic when face-to-face meetings weren't possible. But the convenience of the solution attracted many customers long-term. Even after the massive boost that DocuSign experienced during the pandemic, it is growing its customer count. In FY 2023's third quarter (ending Oct. 31), DocuSign's customer count rose 19% year over year (YOY).
But what sent the stock soaring after earnings was DocuSign's billings beat. Billings were $659 million, up 17% YOY. However, analysts were expecting $589 million -- a massive 12% beat. This increase shows that DocuSign's business may be turning around, and recently hired CEO Allan Thygesen could have something to do with it. Although he's only been at the company since Oct. 10, it may have been enough time for him to influence the company.
During the conference call, he also gave investors hope, stating that the business is stabilizing and that DocuSign's future is still bright. With the stock trading for a dirt-cheap 4.2 times sales, this quarter may mark the turnaround point for DocuSign shareholders.
The sell side: DocuSign is still unprofitable
The earnings report wasn't all sunshine and rainbows; DocuSign is still losing money. In Q3, DocuSign lost nearly $30 million, compared to $5.7 million last year. However, DocuSign also incurred a $28 million restructuring charge in Q3, which included cutting back the workforce.
Layoffs can be viewed from two perspectives: Is the company getting leaner and more efficient? Or is the business just so bad that it can't sustain its employee base? The language on the call seemed to indicate the former was the case, but few companies come out and say they are struggling. Still, it might be wise to stay away from it until DocuSign can prove its business has truly stabilized and can create real profits.
The hold case: Investors might want to see what Allan Thygesen does
If investors view both points from the buy and sell sides in the same light, it may be smart to hold the stock. DocuSign's new CEO is still unproven, and some of his most significant decisions, good or bad, likely haven't contributed to the company yet.
While business is looking better with the massive billings beat, investors will always be skeptical of the company until it can convert that revenue into profits.
So, where do I sit? I'm firmly in the buy camp. The stock is cheap, and besides a one-time restructuring charge, DocuSign is within $2 million of breaking even compared to $646 million in total revenue (just a 0.3% loss margin). Additionally, DocuSign's large commercial customers increased by 26% to 202,000, showing big clients are still signing up for the product suite.
DocuSign had some tough comparisons in 2022, but those will dissipate in 2023. That makes me bullish on the stock, and I wouldn't be surprised if 2023 is an excellent year for DocuSign.
