DocuSign (DOCU -0.26%) has taken investors on a wild ride since its IPO in 2018. The e-signature services leader went public at $29, skyrocketed to an all-time high of $310.05 on Sept. 3, 2021, but now trades at $41. A $10,000 investment in its IPO would have grown to nearly $107,000 before shrinking back to about $14,000.
A 40% return in five years isn't too bad, but it likely disappointed investors who had expected DocuSign to generate bigger multibagger gains. Could this out-of-favor growth stock still help you retire as a millionaire over the next few decades?
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The mathematical path to a million dollars
Let's assume you have $10,000 to invest and 30 years until retirement. If that investment appreciates at a compound annual growth rate (CAGR) of 17% over the next three decades, it will be worth $1,000,000 by the final year.
DocuSign's annual revenue grew at a CAGR of 37% between fiscal 2019 and fiscal 2023 (which ended on Jan. 31). Its growth accelerated during the pandemic as more people relied on digital signatures and contracts, but it subsequently suffered a slowdown over the past two years as the macro headwinds drove companies to rein in their spending.
|
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.
DocuSign expects its revenue to only rise 9% in fiscal 2024, while analysts expect its revenue to only grow at a CAGR of 8% from fiscal 2023 to fiscal 2026. That's not a promising start toward generating a 100-bagger gain in 30 years.
DocuSign could still grow and evolve
We should take those estimates with a grain of salt, but DocuSign might be running out of room to grow. It already controls about 70% of the e-signature services market, but competitors like Adobe (ADBE 0.87%) Sign and Dropbox (DBX 0.92%) Sign might gain ground by bundling their services into their more diversified ecosystems.
On the bright side, the global digital signature market could still grow at a CAGR of 35% from 2023 to 2030, according to Fortune Business Insights -- so there might be enough room for DocuSign and its rivals to grow without trampling each other.
DocuSign's growth could also accelerate again as the macro environment improves and it expands its ecosystem beyond e-signature services. Its new CEO, Allan Thygesen, who took the helm last October, has already directed the company to widen its moat with new artificial intelligence (AI) services, digital contract tools, and deeper integrations with Microsoft Teams, Zoom, Salesforce's Slack, and other enterprise collaboration platforms. That expansion could help DocuSign evolve into a more diversified enterprise software company.
During DocuSign's latest conference call in September, Thygesen said the company was still "planning and executing toward further acceleration in the years to come." CFO Blake Grayson also said it was still spending "70-plus percent" of its time trying to figure out how to "really reaccelerate growth" beyond its current macro challenges.
But DocuSign also looks historically cheap
At its all-time high, DocuSign's market cap hit $61 billion, or 29 times the revenue it would generate in fiscal 2022. That nosebleed valuation became unsustainable as interest rates rose, but it currently has a market cap of just $8.4 billion -- which is just three times the revenue it's expected to generate in fiscal 2024.
DocuSign might not be able to achieve a 17% CAGR over the next three decades. But if it evolves, expands, and grows its top line at a stable CAGR of 10% over the next 30 years, its annual revenue would rise from $2.5 billion in fiscal 2023 to $44 billion in fiscal 2053. If it's still trading at three times sales by then, its market cap would reach $132 billion -- which would turn a $10,000 investment today into nearly $160,000. Even if its price-to-sales ratio rises, it still seems unlikely DocuSign can turn a $10,000 investment into $1 million on its own within the next three decades.
Don't put all your eggs in one basket
It's generally a bad idea to hope a single stock funds your entire retirement. Therefore, DocuSign might not be a millionaire-maker stock, but it could belong in a more diversified portfolio filled with other potential multibaggers. So, for now, investors should focus on DocuSign's ability to widen its moat, expand its ecosystem, and reaccelerate its revenue and billings growth. If it can achieve those three near-term goals, it might be worth buying as a long-term investment again.
