DocuSign (DOCU -1.10%) was once a red-hot growth stock. The e-signature services leader went public at $29 per share in April 2018, and its shares closed at a record high of $310.05 in September 2021. Investors were initially dazzled by its dominance of the e-signature services market, its rapid revenue growth, and its promising long-term prospects.
But today, DocuSign's stock trades at about $60. The ten-bagger shrank to a two-bagger amid concerns about its cooling sales, ongoing losses, high leverage, and the abrupt departure of its CEO Dan Springer last June. Should investors start a new position in DocuSign after that steep drawdown? Let's review the bear and bull cases to see if it could recover in 2023.
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What the bears will tell you about DocuSign
The bears believe the days of DocuSign controlling about 70% of the e-signatures market could end as other formidable competitors enter the market. Adobe (ADBE -0.16%) now bundles a similar service, Adobe Sign, into its own first-party services (including Acrobat) and third-party applications like Salesforce (CRM -1.05%). Dropbox (DBX 0.11%) and Box (BOX 0.57%) also integrated e-signature features into their cloud-based storage platforms.
DocuSign generated robust growth in fiscal 2021 (which ended in January 2021) and fiscal 2022 as the pandemic drove more companies to go paperless and adopt e-signature services, but those tailwinds dissipated in fiscal 2023. Its business also isn't immune to rising rates and other macro headwinds, which are throttling enterprise spending on big software upgrades.
Between fiscal 2019 and fiscal 2022, DocuSign's billings and revenue both increased at a compound annual growth rate (CAGR) of 44%. But for fiscal 2023, it expects its billings to grow just 9% to 10% to $2.6 billion as its revenue rises 19% to $2.5 billion.
DocuSign remains deeply unprofitable on a generally accepted accounting principles (GAAP) basis, and analysts expect its net loss to widen from $70 million in fiscal 2022 to $123 million in fiscal 2023. All that red ink, along with its high debt-to-equity ratio of 4.8, could make DocuSign an unappealing investment as interest rates continue to rise.
What the bulls will tell you about DocuSign
DocuSign's new CEO Allan Thygesen believes the company's revenue growth will accelerate again as it expands overseas and launches additional services for its subscription-based DocuSign Agreement Cloud. Thygesen didn't provide any exact guidance for fiscal 2024 and beyond, but he said he "didn't join to run a low or mid-single-digit revenue company" during the company's third-quarter conference call in early December.
The bulls will point out that DocuSign's non-GAAP gross margins have hovered around 80% ever since its IPO. Its non-GAAP operating margins, which exclude its stock-based compensation and other one-time charges, have also expanded from 2% in fiscal 2019 to 20% in fiscal 2022. It's also remained consistently profitable on a non-GAAP basis since fiscal 2019.
For fiscal 2023, DocuSign expects its non-GAAP gross and operating margins to come in at 81% to 82% and 18% to 20%, respectively. Those stable margins suggest it still has plenty of pricing power in the e-signatures market, and that its GAAP profits could quickly improve and turn positive -- as long as it reins in the stock-based compensation expenses that consumed over a fifth of its revenues in the first nine months of fiscal 2023.
Lastly, DocuSign looks a lot cheaper than it did in late 2021. At its all-time high, the company had an enterprise value of $60.9 billion -- or 24 times its anticipated sales for fiscal 2023. But with its current enterprise value of $11.2 billion, it trades at just four times next year's sales. That valuation is reasonable relative to DocuSign's top line growth and its industry peers. By comparison, Adobe -- which is expected to generate 12% sales growth next year -- trades at seven times that forecast. Box, which is expected to grow its top line by 11% next year, trades at four times that estimate.
Which argument makes more sense?
It made sense to turn bearish on DocuSign in late 2021 when its valuations were bubbling over and it faced a post-pandemic slowdown. However, its stabilizing margins and cooler valuations could limit its downside potential at these levels. I don't think DocuSign's stock will skyrocket anytime soon, but it might be the right time to gradually accumulate more shares.
