The height of the pandemic during 2020 and 2021 drove some interesting trends as society adjusted to travel restrictions and lockdowns. It suddenly became more difficult for businesses to do deals because they couldn't physically get in the room with their counterparts to negotiate, so digital documents company DocuSign (DOCU -0.26%) became a godsend.
DocuSign is the leader in e-signature technology, but it rapidly expanded to serve more customer needs during the worst of the pandemic, and it now offers a portfolio of cloud-based document tools. But society is moving freely again and restrictions are a thing of the past, so the company has struggled to maintain its incredible momentum from that period.
As a result, investors have sent its stock down 26% in 2023 alone, and it's trading 86% below its all-time high. But has the sell-off gone too far? Here's why it might be time to buy the stock.
DocuSign has evolved from its days as an e-signature company
DocuSign has now developed a portfolio of tools designed to manage the entire contract life cycle, from document formation to negotiation to final signoff. This is done through its Agreement Cloud, which is a collection of over a dozen applications and 400 potential integrations with different third-party software platforms.
Like most companies in the technology space, DocuSign is also leaning on artificial intelligence (AI) to better serve customers. Earlier this year, it introduced a new tool called Agreement Summarization, which operates on Microsoft's cloud-based Azure OpenAI Service. It runs on the same generative AI technology that powers the ChatGPT chatbot, and it's designed to boil down complex agreements to their key points so the reader doesn't miss critical information.
DocuSign Insight is another AI-powered tool that can be trained to identify problematic clauses within contracts, or even potential opportunities. While DocuSign's AI tools aren't ready to replace your lawyer just yet, the technology is advancing at a rapid pace and the potential for cost savings is clear.
DocuSign has amassed more than 1 billion users worldwide, which is a sure sign it creates value for consumers and businesses. Around 1.44 million of those users are paying customers, and they include all of the Fortune 500 top 25 healthcare companies, all of the top 25 financial companies, and 18 out of 20 of the top technology businesses.
DocuSign's revenue growth has slowed, but there is a silver lining
In DocuSign's fiscal 2021 (ended Jan. 31, 2021), it generated $1.4 billion in revenue, which was a whopping 49% increase from the prior year. That growth rate slowed to 45% in fiscal 2022 (ended Jan. 31, 2022), and it decelerated even more dramatically to just 19% in fiscal 2023 (ended Jan. 31, 2023).
DocuSign's relentless focus on innovation simply wasn't enough to offset the removal of pandemic restrictions, which led to falling demand for digital document tools overall. Unfortunately, the downward trend in the company's growth has persisted in the first half of fiscal 2024 (ended July 31), with revenue increasing by just 11%.
However, the more recent slowdown is partly by design. DocuSign spent years losing money because it chose to invest aggressively in growth no matter the cost, but it has recently focused on profitability instead. That means carefully managing costs so more money flows to the bottom line, and in the first half of fiscal 2024, it only increased its operating expenses by 6%.
The results are clear. DocuSign delivered net income (profit) of $7.9 million for the six-month period, which is an enormous swing from the $72 million net loss it generated the same time a year ago. Its bottom line was even more impressive on a non-GAAP basis, which excludes one-off and non-cash expenses.
DocuSign dished out $291 million in stock-based compensation during the first six months of fiscal 2024, for example, which is a non-cash expense. Therefore, the company's non-GAAP net income came in at $299 million, up 78% from the year-ago period.
Why it might be time to buy DocuSign stock
Based on DocuSign's $2.6 billion in trailing-12-month revenue, its stock trades at a price-to-sales (P/S) ratio of just 3.2, which is near the cheapest P/S since the company listed publicly in 2018.
Plus, over the last four quarters, DocuSign has generated $2.66 in non-GAAP earnings per share. That places its stock at a price-to-earnings (P/E) ratio of roughly 16 (based on its current price near $42). That's a 47% discount to the broader technology sector as represented by the Nasdaq-100 index, which trades at a P/E of roughly 30.
As I mentioned at the top, DocuSign stock is trading 86% below its all-time high. Will it revisit that lofty level? Not anytime soon. But this is still a growing company, and there is upside potential based on its valuation alone.
Therefore, the multiyear sell-off in DocuSign stock might be overdone, and patient investors willing to buy this former pandemic darling could be rewarded going forward.
