Long-term investors in DocuSign (DOCU 0.17%) are in a world of pain. Shares of the e-signature company have plummeted more than 80% from their all-time high. There are, however, indications that better days are ahead. So, should investors sign on the dotted line with DocuSign or not? Let's have a closer look.
Image source: Getty Images.
More than just a pandemic play?
It's probably unfair to characterize stocks as "pandemic" stocks. Companies like Zoom Video Communications, Teladoc Health, and Peloton Interactive were founded years before anyone had heard of COVID-19, and their business models do not rely on millions of people remaining housebound week after week.
Nevertheless, due to pandemic restrictions, many of these stocks -- including DocuSign -- soared in 2020 and 2021.
So, now that DocuSign, like most of the others, has come crashing back to earth, investors want to know whether the company is worth owning.
DocuSign's fundamentals reveal a thriving company. Gross profit margin stands at a record high of 78%. Increasing gross profit margins show that DocuSign continues to inch its way closer to overall profitability -- an important milestone for a young company early in its life cycle.
DOCU free cash flow data by YCharts.
Meanwhile, DocuSign's free cash flow has risen substantially over the last three years to $386 million as of its most recent quarter (the three months ending on Oct. 30, 2022). That's a key metric that shows it can continue to fund its growth organically without going to the increasingly costly debt markets.
Moreover, the balance sheet is solid, with $975 million of cash and $837 million of debt, for a total net cash position of $138 million.
NASDAQ: DOCU
Key Data Points
Is DocuSign a buy now?
With its fundamentals looking good, the question remains: What about the future? The company clearly executed well during the pandemic, as customers flocked to its e-signature products for their simplicity, speed, and ease of use.
Large customers (those with over $300,000 in annualized contracted value) have risen to 1,052 as of DocuSign's most recent quarter. But other key metrics, such as dollar-based net retention (DBNR) show some slippage.
DBNR has declined from a peak of 125% to 108% as of last quarter. That demonstrates that DocuSign is either losing customers or finding it more challenging to extract additional sales from existing customers.
Image source: DocuSign Q3 2023 earnings presentation.
On the face of it, that looks concerning, but looks can be deceiving. While DBNR is declining, it remains above 100%. Moreover, DocuSign's core product, eSignature, is quite sticky. Once the company lands a client, it's likely to remain a client. The cost of switching or reverting to paper signatures is simply too great.
As DocuSign continues to mature, consistent profitability is its next hurdle. I think investors would be wise to load up on shares now, before it achieves that goal.
