E-signature leader DocuSign (DOCU -1.80%) is trying to diversify, and for good reason. It's not clear whether the company has any meaningful competitive advantage in the e-signature market, other than name recognition.

Contract lifecycle management, or CLM, is the company's big growth opportunity. DocuSign wants to handle all aspects of contracts and agreements, including document creation, collaboration, and negotiation, while layering on advanced functionality like automated workflows and analytics.

Troubling guidance

While CLM may indeed drive revenue growth in the future, right now it's not helping much. DocuSign reported 14% year-over-year revenue growth in the fourth quarter and 10% billings growth, but its guidance signaled that a harsher slowdown is coming. For fiscal 2024, which ends on Jan. 31, 2024, DocuSign expects revenue and billings growth to decelerate significantly.

Revenue should come in right around $2.7 billion, according to DocuSign's guidance, up about 8% from fiscal 2023. The outlook for billings, which is the value of invoices sent to customers, is worse. DocuSign expects to report full-year billings of $2.725 billion at the high-end of its guidance, barely higher than the $2.7 billion in billings reported in fiscal 2023.

Unsurprisingly, this guidance spooked investors. On top of the weak guidance, DocuSign also announced a management shake-up with the departure of CFO Cynthia Gaylor. DocuSign stock was down around 20% a few hours before the market closed on Friday.

A valuation that's tough to justify

One thing DocuSign has done a good job of is keeping costs in check as growth has slowed. The company barely increased its sales and marketing spending on a year-over-year basis in the fourth quarter, helping it to produce a small GAAP net profit.

It's hard to square this level of profitability with a market capitalization of around $10 billion, though. DocuSign's days of hyper-growth are over. Once this economic storm passes, DocuSign could certainly return to solid double-digit revenue growth. But that's not a guarantee, and competition in the core e-signature market will only become fiercer.

DocuSign is much more profitable if you consider adjusted net income or free cash flow, but there's a catch: The company doles out a lot of stock-based compensation. For fiscal 2023, DocuSign booked a $538 million stock-based compensation charge, which is added back to both adjusted net income and free cash flow. While DocuSign reported free cash flow of $429 million for the year, that metric falls into negative territory if you adjust for stock-based compensation.

The bottom line, at least in my view, is that DocuSign is not a particularly profitable company. The price-to-sales ratio sits right around 4, but there's no reason it can't go much lower, especially if DocuSign's outlook turns out to be overly optimistic.

The long-term growth story now largely revolves around the CLM business, which is far from guaranteed to be a success. While e-signature capabilities seem like an obvious thing that many businesses would want, it's less clear that contract management will be in high demand. The global CLM solutions market is estimated to reach about $3.5 billion in size by 2030, according to Fortune Business Insights. Given that DocuSign will capture only a fraction of the market, CLM just doesn't seem like a hugely compelling opportunity.

While DocuSign stock is already down more than 80% from its peak, the valuation seems optimistic to me. Don't be surprised if the stock keeps tumbling as investors reckon with a crumbling growth story.