DocuSign (DOCU -0.26%) was one of the darlings of the pandemic. As the population locked down, the company provided the perfect avenue for contract executions in a world where people had to avoid close personal contact.
That growth led to the stock price peaking at more than $300 per share in 2021, and one could understand the optimism at the time. Due to the convenience of its processes, the company had an opportunity to retain much of its business as lockdowns ended.
Unfortunately for the company, competition from Adobe, Dropbox, and others has eaten away at its growth, and DocuSign sells for an 80% discount to its all-time high. But does that make the SaaS stock an excellent investment? Let's take a closer look.
The state of DocuSign
Amid the rising competition in the digital signature market, investors may understandably struggle with DocuSign stock. On the one hand, Fortune Business Insights expects the online signature market to grow at a 35% compound annual growth rate (CAGR) through 2030.
Nonetheless, by 2030, it expects the market size to reach about $43 billion, up from just over $5 billion in 2023. In fiscal 2024 (ended Jan. 31), DocuSign forecasts approximately $2.75 billion in revenue, indicating that it has already captured most of the existing market.
Recognizing these challenges, DocuSign attempted to shift its focus to contract lifecycle management (CLM) software. This software tracks and manages contracts while measuring performance, checking compliance, tracking renewals, and other management tasks. It can also apply artificial intelligence (AI) to extract and analyze critical data points to make document reviews more efficient.
DocuSign by the numbers
Unfortunately, neither a fast-growing addressable market nor its CLM offering has led to massive revenue growth. In the first nine months of fiscal 2024 (ended Oct. 31, 2023), DocuSign earned just over $2 billion in revenue, rising 10% versus the same period one year ago.
The company has kept a lid on expense growth and earned more interest income, allowing it to report $47 million in net income in the first three quarters of fiscal 2024. It improved over the year-ago period, when DocuSign lost $102 million.
Still, profitability has done little to boost the stock, which rose only about 5% over the last year. It might have fallen had some private equity firms not taken an interest in possibly buying the company.
If one of the proposed private equity deals goes through, DocuSign could cease to exist as a stock, either temporarily or permanently. Since the stock price has risen due to rumors, it is also unclear what kind of return current investors might earn from such a deal.
A low valuation may be a draw for those prospective buyers. Despite only recently turning profitable, DocuSign trades at a forward price-to-earnings (P/E) ratio of around 21. That could also induce more institutional or individual investors to take a chance on the stock, assuming it continues to trade, of course.
Should I buy DocuSign?
At current levels, DocuSign stock would look like a buy, but that becomes complicated if private equity investors buy it first. A private equity purchase could mean the stock won't trade for much longer, and the proposed buy price may effectively become a price ceiling. Moreover, the comparatively slow revenue growth makes it unlikely the stock will return to its pandemic high.
The 35% industry CAGR could stoke increases in the stock, albeit growth that lags that percentage. Assuming the company is not bought out, it holds the potential to beat the market, but maybe not to the extent that growth investors hope it will.
