A darling of the stock market during coronavirus lockdowns, leading digital-signature and contract-management player DocuSign (DOCU +1.23%) has seen its shares drop by nearly 80% from their all-time high of $310 in September 2021.
Much of this drawdown can be attributed to very slow top-line growth amid an elongated sales cycle and increased competition from bigger players such as Adobe and Dropbox as well as new entrants in the digital-signature market.
Recently, however, the stock has been on an upswing, climbing nearly 62% from its low of $38 in this past October amid rumors of a potential buyout by a private equity firm. According to a Reuters report, Bain Capital and Hellman & Friedman may be among the final bidders in an auction for DocuSign.
However, even if such a take-out deal does not go through, there are still factors that could catapult DocuSign's shares higher in the coming months.
NASDAQ: DOCU
Key Data Points
Global-market leader
The increasing shift toward digitization and the rising adoption of cloud-based solutions have fueled demand for electronic-signature and agreement-management solutions. The global electronic-signature market is estimated to grow at a compound annual rate of 35.1% from 2023 to 2030, reaching $43.1 billion.
As the market leader with a 67% share of the global e-signature market, DocuSign is seeing its solutions increasingly adopted by companies across industries for various uses. The company currently caters to over 1.4 million paying customers, while nearly a billion people use its platform globally.
DocuSign is seeing particular strength in international markets, where revenue is growing three times faster than in North America. The company's omnichannel, go-to-market strategy and rapid digital-channel growth are helping drive new customer acquisition.
Moreover, the company is leveraging artificial intelligence (AI) technologies to summarize agreements, analyze business and legal contracts to assess risks and opportunities, and extract common key terms and clauses to simplify the document review process.
Partnerships driving new opportunities
DocuSign is exploring more opportunities by expanding its product capabilities and penetrating new markets through collaborations with companies like Microsoft and Meta Platforms. The company is the sole digital-signature provider for Microsoft's Power Page Integration, helping website makers streamline signatures without code. The partnership has also enabled DocuSign to further explore opportunities in building pre- and post-signature workflows.
DocuSign's integration with Meta Platform's WhatsApp is also helping the digital-signature provider tap into the latter's broad user base. It can facilitate quicker agreement signings in geographies where WhatsApp dominates communication.
Agreement management
Going beyond its core digital-signature offering, DocuSign is also focusing on becoming a prominent player in the agreement-management business. The success of the company's contract lifecycle-management (CLM) solutions in North America, used by organizations to handle aspects such as the creation, negotiation, execution, and renewal of contracts, highlights the huge growth potential in the overall agreement-management market.
The company's Agreement Cloud platform, which encompasses over 12 applications and more than 400 integrations, helps streamline the entire agreement-management process and offers solutions such as CLM, identity verification, electronic notarization, and digital signing.
DocuSign has been consistently introducing new features and functionalities to reduce friction and improve the customer experience in the agreement-management process. Recently, the company has launched Microsoft Power Automate integration, which allows users to generate personalized, professional-looking documents and then sign them from Microsoft Power Automate.
While DocuSign has been working on this offering since early 2019, it is still mostly a negligible part of its revenue mix. Hence, although the CLM is estimated to be a $25 billion market opportunity, there is still much work needed to make it a material catalyst for the company.
Improving profitability and a robust balance sheet
Despite a slowing top line amid a difficult macroeconomic environment, DocuSign posted a net profit -- based on generally accepted accounting principles (GAAP) -- of $0.19 per diluted share in the third quarter (ended Oct. 31, 2023). That's an impressive improvement from $0.15 loss per share in the same quarter of the prior year.
DocuSign also saw a staggering 565% year-over-year jump in free cash flows to $240.3 million at the end of the quarter. The company has an impressive balance sheet with nearly $1.6 billion in cash and only $835 million in debt. These factors seem to have made the company an attractive option for potential leveraged buyout by private equity companies.
Is DocuSign a buy?
It is undeniable that DocuSign is facing a host of challenges such as a falling billings-growth rate and a slowing dollar-based net-retention rate. However, the company's large customer base, robust balance sheet, and focus on cost cutting can prove to be pivotal in reinvigorating long-term growth.
DocuSign is currently trading at a price-to-sales ratio of just 4.6, far lower than its five-year average of 12.7. Considering the company's multiple-growth tailwinds, stable financials, and bargain-bin valuation, investors can consider taking a stake in this stock.
