DocuSign (DOCU -0.26%) posted its latest earnings report on June 8. In the first quarter of fiscal 2024, which ended on April 30, the e-signature services leader's revenue rose 12% year over year to $661 million and surpassed analysts' expectations by $20 million. Its adjusted EPS rose 89% to $0.72 and also cleared the consensus forecast by $0.16.
However, DocuSign's stock still dipped after that earnings beat and remains more than 80% below its all-time high from September 2021. Should investors pick up some shares of this out-of-favor tech stock while the bulls turn the other way?
Image source: Getty Images.
Why didn't DocuSign impress the bulls?
DocuSign controls roughly 70% of the e-signature market by serving more than 1.4 million customers and over a billion users worldwide. That market dominance enabled it to profit from the digital displacement of paper-based signatures, and it locked in its customers with additional cloud-based contract management tools.
DocuSign grew like a weed after its IPO in 2018, and it experienced another major growth spurt throughout fiscal 2021, which ended in January 2021, as the pandemic drove more businesses to use its digital signatures and contracts. But over the past two years, its growth in billings and revenues cooled off.
|
Metric |
FY 2019 |
FY 2020 |
FY 2021 |
FY 2022 |
FY 2023 |
|---|---|---|---|---|---|
|
Billings growth |
34% |
38% |
56% |
37% |
13% |
|
Revenue growth |
35% |
39% |
49% |
45% |
19% |
Data source: DocuSign.
That slowdown was caused by three challenges. First, it faced tough comparisons in fiscal 2022 as the pandemic passed. Second, inflation, rising interest rates, and other macro headwinds throttled its growth throughout fiscal 2023.
Lastly, DocuSign faced tougher competition in the e-signature services market from similar services such as Sign from Adobe (ADBE 0.87%), which is integrated into Acrobat; and Sign from Dropbox (DBX 0.92%), which is bundled with its cloud-based storage services. All of those challenges, along with the abrupt resignation of CEO Dan Springer last year, convinced the bulls that DocuSign's high-growth days were over.
Meanwhile, rising interest rates drove investors toward cheaper and more conservative investments over the past year. At its all-time high, DocuSign's enterprise value reached $61 billion -- or 29 times the revenue it would actually generate in fiscal 2022. That bubbly valuation, along with its decelerating growth, made it an easy target for the bears.
Are brighter days ahead for DocuSign?
DocuSign's slowdown persisted in the first quarter of fiscal 2024, with just 10% year-over-year billings growth and 12% revenue growth. For the second quarter, it expects its billings to rise up to 1% year over year as its revenue grows 8% to 9%.
For the full year, it expects its billings to rise only 3% to 4% as its revenue increases 8%. During its latest conference call, new CEO Allan Thygesen said the company continued to face a "challenging macro environment, with cautious customer sentiment evident in moderating expansion rates."
To cope with that slowdown, DocuSign has been reining in its spending. It laid off 9% of its workforce last year and another 10% earlier this year, and those deep cuts boosted its adjusted operating margin by 10 percentage points year over year, and three percentage points sequentially, to 27% in the first quarter of fiscal 2024.
But looking ahead, DocuSign expects its adjusted operating margin to dip sequentially to 24%-25% in the second quarter as it continues to roll out newer features to expand its ecosystem. Those new services include easy-to-create Web forms for gathering data and signatures, more advanced ID verification tools, integrations with electronic health records in the U.S market, and even generative AI summaries of long and complicated contracts.
But looking past that near-term spending bump, DocuSign still expects its full-year adjusted operating margin to rise from 21% in fiscal 2023 to a range of 22% to 24% in fiscal 2024. Analysts expect its adjusted EPS to grow 19% for the full year.
Should you buy DocuSign's stock right now?
DocuSign looks reasonably valued today at 24 times forward earnings and four times this year's sales. But there are plenty of other tech companies growing at faster rates and trading at comparable valuations. Analysts expect Adobe to grow its revenue and earnings by 10% and 13%, respectively, this year, and it trades at 27 times forward earnings. Dropbox is expected to grow its revenue and earnings by 7% and 17%, respectively, this year, but it has a forward multiple of 13.
Therefore, I don't think there are any compelling reasons to buy DocuSign -- even as it trades at a steep discount to its all-time high -- when its growth will remain sluggish for the foreseeable future. Its growth might eventually accelerate again, but investors should steer clear of this out-of-favor stock until more green shoots appear.
