DocuSign (DOCU -0.37%) was a stock market darling during pandemic-induced social distancing and shelter-in-place conditions, but the company's valuation suffered a big pullback as COVID-19 tailwinds lessened and macroeconomic headwinds curbed the market's appetite for growth stocks. Even after a surge following better-than-expected third-quarter earnings results, the software company's share price is down 54% over the last year and roughly 81% from its high.
Should investors treat the big pullback as a buying opportunity, or is there still too much downside risk at current prices? Read on to see our Motley Fool contributors present their bullish and bearish takes on what comes next for DocuSign stock.
The bullish take: DocuSign offers a practical solution to an inconvenience
Parkev Tatevosian: DocuSign provides enterprises, institutions, and individuals with a solution to an annoying necessity. Agreements, transactions, and sales often need to be put on paper and signed. That said, there is no requirement that these written agreements be on physical paper, if digital can be arranged. In many ways, DocuSign's e-signature service is an incredible improvement from creating documents in physical form, which force people to come together in person to sign.
That convenience advantage can partly explain why DocuSign's revenue skyrocketed from $250 million in 2016 to $2.1 billion in 2022. Of course, the company got a lift from the COVID-19 pandemic after social distancing became necessary. Still, there is a long way to go before DocuSign achieves its long-term potential in customer adoption. DocuSign is not yet profitable on the bottom line, but it is growing cash flow nicely.
DOCU Cash from Operations (TTM) data by YCharts
Indeed, DocuSign's cash flow from operations in the trailing 12 months increased to $457 million as of its most recent update, up from less than $150 million before July 2020 (see chart above). Fortunately, investors can buy DocuSign's stock at a price-to-free-cash-flow ratio of 30 -- the cheapest investors have been able to purchase the stock in its relatively young history as a publicly traded company.
The bear take: Growth will be much slower going forward
Keith Noonan: DocuSign stock surged after the company's third-quarter results included a big earnings beat and better-than-anticipated revenue, but the stock could potentially struggle in 2023.
While the company's non-GAAP (adjusted) earnings per share of $0.57 came in well ahead of the average analyst estimate's call for per-share earnings of $0.42, there are signs that its growth engine is faltering. DocuSign accomplished the big Q3 earnings beat largely through cost-cutting initiatives. Furthermore, sales expansion slowed, and the near-term growth outlook isn't terribly exciting.
The company added 42,000 new customers in Q3, down from 44,000 additions in the previous quarter and 59,000 in the previous year's third quarter. Revenue growth of 18% in Q3 was down from growth of 22% in Q2 and down from 42% in the prior-year period. Meanwhile, management's guidance for Q4 calls for revenue growth of roughly 10% at the midpoint. Like many companies, DocuSign is facing a tougher operating backdrop amid mounting macroeconomic headwinds.
The company is generally seeing smaller deal sizes, decelerating growth rates among existing customers, and tightening purse strings across its addressable market. Facing these challenges, management anticipates overall revenue growth to decelerate to a high-single-digit rate in the current fiscal year and for billings to grow at a low-single-digit rate.
DOCU PS Ratio (Forward) data by YCharts
With the stock trading at roughly 30 times expected forward earnings and 4.6 times expected sales, DocuSign still has a growth-dependent valuation, and its share price could see a substantial drawdown from current levels if bearish pressures continue to shape the market at large.
Making matters worse, DocuSign doesn't appear to have a clear moat. While the company built a strong position in its core service category and has some valuable partnerships with important companies, competitors including Adobe and Oracle may be able to streamline their offerings and gain market share.
Should you buy DocuSign stock now?
Despite share price gains following the company's third-quarter report, investors still have a chance to purchase DocuSign stock at levels that look cheap on a historical basis. On the other hand, it seems very likely that macroeconomic challenges will lead to much slower growth in the near term, and DocuSign isn't a low-risk stock. Investors should weigh their personal risk tolerance, portfolio growth goals, and expectations for the company's service platform before deciding whether the stock is a good fit.
