DocuSign (DOCU -0.26%) was one of the market's hottest tech stocks in 2021. The e-signature service leader's shares closed at a record high of $310.05 that September, marking a 969% gain from its IPO price in 2018.
At the time, DocuSign's business was firing on all cylinders, its billings growth was accelerating as the pandemic drove more companies to adopt its digital signatures, and the bulls blissfully ignored its rising valuations.
Image source: Getty Images.
But today DocuSign's stock trades at about $50. Its stock dropped as its growth cooled off in a post-pandemic market, macro headwinds made it tougher to gain new customers, and rising interest rates compressed its valuations. Its CEO Dan Springer also abruptly stepped down in 2022 as its stock tumbled, and stiff competition from diversified tech giants like Adobe (ADBE 0.87%) suggested it was running out of room to grow.
DocuSign's new CEO Allan Thygesen believes the company's growth will accelerate again as it expands its ecosystem. But will DocuSign evolve into a more diversified cloud software giant like Adobe? Or will it fail to expand beyond its niche market?
What happened to DocuSign?
From fiscal 2019 to fiscal 2023 (which ended on Jan. 31, 2023), DocuSign's revenue grew at a compound annual growth rate (CAGR) of 37%. However, its billings and revenue growth decelerated significantly in fiscal 2022 and fiscal 2023.
|
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 billings and revenue to only rise 5% and 10%, respectively, in fiscal 2024. Analysts expect its revenue to grow at a CAGR of 8% from fiscal 2023 to fiscal 2026. That dim outlook suggests its high-growth days are over.
On the bright side, DocuSign's operating margins are expanding as it reins in its spending, and analysts expect it to turn profitable on a generally accepted accounting principles (GAAP) basis in fiscal 2024. However, those cost-cutting measures -- along with its big buybacks over the past year -- could hamper its evolution into a more diversified cloud software company.
Under Thygesen, DocuSign has rolled out new artificial intelligence (AI) features, digital contract tools, and deeper integrations with Microsoft Teams, Zoom Video Communications, Salesforce's Slack, and other popular collaboration platforms. However, DocuSign already controls about 70% of the e-signature services market, and those new features aren't meaningfully expanding its market share, nor widening its moat against similar services like Adobe Sign and Dropbox Sign.
Why DocuSign can't become the next Adobe
The bulls might believe DocuSign can eventually evolve into a more diversified cloud software leader like Adobe. However, the two companies have different business models.
Adobe had already established itself as a leader in the digital media software market with industry-standard tools like Photoshop, Premiere, and Illustrator before it shrewdly transformed its desktop versions into cloud-based services over the past decade. It had also gained a firm foothold in the digital document market with Acrobat, and it launched additional e-commerce, marketing, and analytics services for enterprise customers.
Meanwhile, DocuSign established a first-mover advantage in the digital signatures space, it locked in most of the Fortune 500, and it gobbled up many of its smaller competitors. However, it only started expanding its business beyond e-signatures with its $220 million acquisition of the contract lifecycle management company SpringCM in 2018.
That acquisition suggested that DocuSign was saturating its core e-signature service market, but its temporary acceleration during the pandemic masked that long-term slowdown. But now that the pandemic is (unofficially) over, it faces tough macro and competitive headwinds. It also needs to widen its moat against better-diversified tech companies like Adobe and Dropbox, which both integrate their e-signature tools into their broader ecosystems.
Simply put, DocuSign didn't capitalize on its early growth spurt to grow into a diversified cloud software company like Adobe, and it might be too late to catch up. That's why DocuSign's stock trades at less than 4 times this year's sales, while Adobe -- which is growing a lot faster -- trades at 13 times this year's sales. DocuSign might eventually stabilize its business and generate stable growth at a reasonable valuation, but I don't think it has a shot at becoming the next Adobe.
