DocuSign Just Delivered Its First Profitable Year in Its History. Is It Time to Buy DocuSign Stock?

DocuSign (DOCU -0.26%) stock soared to an all-time high of $310 in late 2021 on the back of the company's substantial revenue growth, driven by its portfolio of digital document software that allowed businesses to close deals remotely in the face of COVID-19 lockdowns and social restrictions.

But with society now largely back to normal, management is focused on making DocuSign's business more sustainable, which means cutting costs and delivering profitability. The strategy is bearing fruit: Fiscal 2024 (ended Jan. 31) was the first profitable year in the company's history.

Unfortunately, it came at a cost. DocuSign's revenue growth has slowed to a crawl, and its stock has plunged 81% from its all-time high. It's incredibly cheap based on two traditional valuation metrics, though, and here's why it might be time to buy.

Image source: Getty Images.

DocuSign is more than a pandemic darling

DocuSign's technology delivers convenience for any organization. Therefore, despite the company producing its best growth at the height of the pandemic, it still serves more than 1 billion users and 1.5 million paying customers.

DocuSign is the leader in e-signature technology, but its Agreement Cloud features more than 15 different applications designed to serve customers at every stage of the agreement life cycle, including contract drafting, negotiating, and closing.

Artificial intelligence (AI) is increasingly important for DocuSign. Its Insight technology can analyze agreements and point out problematic clauses and even potential opportunities. It can save businesses an abundance of time, which means less money spent on legal fees.

DocuSign also launched an innovation division called AI Labs, where select customers can experiment with its new technologies. It's working on tools that can summarize and simplify agreements as well. Over time, customer feedback from AI Labs will determine which products DocuSign brings to market.

The unfortunate cost of DocuSign's profitable year

Most technology companies operate at a loss during their growth phase. They spend heavily on acquiring new customers and developing new products, and once they eventually achieve scale, they cut back on those costs to deliver profitability.

DocuSign generated $2.8 billion in revenue during fiscal 2024, which was a 9.8% year-over-year increase. Its operating costs, however, grew just 4.3%, allowing more money to flow to the company's bottom line. As a result, DocuSign's net income came in at $73.9 million. The below table shows how the bottom line has progressed over the last few years:

Data source: DocuSign.

But there are consequences to trimming costs. DocuSign slightly reduced its sales and marketing expenses in fiscal 2024, for example, which is an important driver of growth across the business. As a result, the 9.8% revenue increase I mentioned above was a sharp deceleration from the 19.4% growth the company delivered in fiscal 2023.

In fiscal 2021 -- at the height of the pandemic -- DocuSign's revenue soared a whopping 49.2%. It increased its marketing spending 35.0% that year. In other words, the company's careful cost management and its trend toward profitability clearly correlates with a slowdown in revenue growth.

Before moving on, I want to highlight DocuSign's fiscal 2024 non-GAAP profit, which strips out one-off and non-cash expenses like stock-based compensation. It came in at $622.9 million, up an impressive 48.7% year over year. That translates into $2.98 in non-GAAP earnings per share, and I'll explain why that's important in a moment.

Is DocuSign stock a buy now?

Revenue growth plays a significant role in the price investors are willing to pay for a stock. Take Nvidia, for example. Its revenue skyrocketed 126% during fiscal 2024 (ended Jan. 28), and investors are now paying a price-to-sales (P/S) valuation multiple of 36.6 for the stock. That's near the highest P/S ratio in the company's history. Why? Because the stock's high price tag appears justified based on Nvidia's future potential, assuming it continues to grow quickly.

On the flip side, investors are paying a P/S ratio of just 3.2 for Amazon stock, which grew a modest 12% in 2023.

Based on DocuSign's $2.8 billion in fiscal 2024 revenue and its current market cap of $11.9 billion, its stock trades at a P/S ratio of 4.3. That's near the cheapest level in its history as a publicly-traded company.

However, DocuSign's $2.98 in non-GAAP earnings per share gives its stock a price-to-earnings (P/E) ratio of just 19.5. That's a 36.4% discount to the 30.6 P/E ratio of the Nasdaq-100 technology index, but I'd argue DocuSign actually deserves a slight premium given the rapid growth for this adjusted earnings metric. That's one very good argument for upside in the stock.

Another good argument is DocuSign's $50 billion total addressable market. The company's current revenue suggests it has only scratched the surface of that opportunity.

Investors are getting a great price for DocuSign stock right now. The company is supported by a strong balance sheet with over $1 billion in cash and short-term investments on hand, so it's well positioned to reaccelerate its spending on growth initiatives -- especially now that it's profitable.

It's unlikely DocuSign stock will revisit its previous all-time high in the near future, but there is certainly potential for market-beating upside at its current price.