Pandemic-era social restrictions are mostly in the rearview mirror and, quite frankly, it feels like they were imposed a lifetime ago. People tend to move forward quickly, but the financial markets are still dealing with the fallout from price distortions caused by COVID-19. Specifically, investors are trying to determine the appropriate levels at which to price certain technology companies that thrived under lockdowns and work-from-home orders but are now adapting to an environment without them.
DocuSign (DOCU 1.56%) is a quintessential example. While management has done a great job pivoting the business to continue growing, it's doing so at a slower pace than in 2020 and 2021. Combined with the broader sell-off in the tech sector, DocuSign stock has plunged 83% from its all-time high.
But the company did deliver one surprise in the fiscal 2023 fourth quarter (ended Jan. 31) relating to its bottom line. So should investors buy, sell, or hold DocuSign stock? Let's find out.
Remote deal-making and the digital economy are here to stay
Some of the technologies we relied upon to get us through the pandemic lockdowns have proven their staying power. Video calling is a great example, and so is food delivery. DocuSign has a portfolio of applications under its Agreement Cloud that help businesses create, negotiate, and close deals no matter where in the world each party is located. That had obvious benefits when international borders were closed, but it turns out businesses have grown comfortable with that level of convenience in general.
It began with DocuSign's industry-leading digital signature (e-signature) technology, but the business has expanded far beyond that one tool. The Agreement Cloud hosts a range of innovative solutions like the Insight platform, which is powered by artificial intelligence (AI) to help businesses analyze contracts for problematic clauses (and even potential opportunities). The goal is to get two parties from contract creation to signature without ever having to physically meet.
DocuSign boasts over 1 billion users worldwide. In Q4, about 1.36 million of them were paid subscribers, but the critical nature of the company's tools can be observed in its highest-spending customer cohort. DocuSign has 1,080 business customers spending at least $300,000 annually, and that number was up 26% compared to the end of fiscal 2022.
DocuSign's net revenue retention rate -- while declining steadily as the company matures -- sits at 107%, meaning existing customers are spending 7% more money each passing year. It sounds like the digital tools on offer are still rather important to the corporate world, even in the absence of pandemic restrictions.
DocuSign continues to grow, just more slowly
DocuSign's full-year revenue came in at $2.5 billion in fiscal 2023 (ended Jan. 31), which was an increase of 19% compared to fiscal 2022. That was a positive result at face value, but it was less than half the growth rate experienced in the prior year.
In fiscal 2024, revenue growth could slow even further to just 7.5%, according to the company's guidance. That outlook is one of the reasons DocuSign stock sank 20% after releasing its financial report.
DocuSign's growth was hindered not only by broader economic turmoil, which is causing businesses of all sizes to spend less money on software services, but also by its own restructuring. In September 2022, the company laid off 9% of its workforce in an effort to cut costs, and it followed that up by laying off 10% of its remaining employees last month (February).
Fewer employees, especially in areas like sales and marketing, can result in fewer customer acquisitions, and cause existing relationships to go unmanaged. Given that the e-signature space in particular is flooded with competition, service is a key differentiator.
But the cost cuts ushered in a welcome profit
In this economic environment, investors want to see companies deliver profits because it reduces the risk they'll require capital injections. DocuSign has consistently lost money on a GAAP basis, which is the measure of true profitability. But in Q4, it delivered a net income of $4.8 million, which translated to $0.02 in earnings per share.
But it's not all positive. The company's pessimistic outlook for revenue growth in fiscal 2024 means it may have to cut costs further -- or at least keep costs flat -- in order to continue to operate at a profit. To make matters more difficult, DocuSign's Chief Financial Officer just announced her intention to step down after two and a half years on the job. That might put a dent in investors' confidence that the company will continue on its path to prioritize profitability.
In light of DocuSign's present circumstances, should investors buy, sell, or hold its stock? The company has a market capitalization of $10.7 billion as of this writing, so the stock trades at a price-to-sales (P/S) ratio of just 4.3, which is near its cheapest valuation on record.
But that doesn't mean it won't get cheaper, and if the company can't maintain profitability in fiscal 2024 after slashing costs and subsequently slowing its revenue growth down, then investors will likely send DocuSign stock lower.
For investors who hold the stock already, it might be worth giving the company a couple of quarters to see how the above-mentioned dynamic plays out. But for those on the sidelines, it might be safer to remain in wait-and-see mode.
