DocuSign (DOCU +4.28%) was a darling during the pandemic. It was well-positioned to facilitate online document administration when people could not meet in person.
As life returned to normal, growth slowed and the stock fell hard. It lost 80% of its value and remains in a bear market more than a year after the bear market ended in other tech stocks.
Nonetheless, DocuSign's growth has not stopped completely, and it hopes to build a competitive advantage by focusing on contract lifecycle management. The question for investors is whether that is enough for buyers to return to this one-time highflier.
NASDAQ: DOCU
Key Data Points
The state of DocuSign
During the pandemic, DocuSign showed that the practice of signing documents in person has become largely obsolete.
Unfortunately for the company, the question is how much the SaaS stock can benefit from its trend-setting innovations. Amid DocuSign's pandemic popularity, high-profile software companies such as Adobe (ADBE +1.85%) and Dropbox entered this business, raising the level of credible competition by a lot.
Hence, DocuSign has turned to the aforementioned contract lifecycle approach to rebuild its competitive advantage. To that end, it just announced its intent to acquire Lexion, a company that can integrate contract management technology powered by artificial intelligence into its ecosystem.
The global market researchers at Fortune Business Insights project a compound annual growth rate (CAGR) of 17% through 2032 for the global document management system industry. Unfortunately for DocuSign, it is unclear how much of this robust market it can capture in an increasingly competitive industry.
DocuSign's financials
In fiscal 2024 (ended Jan. 31), DocuSign reported revenue of just under $2.8 billion, 10% higher than the previous fiscal year.
Fortunately for the company, it slowed its operating expense growth to 4% during that time, earning a net income of $74 million. That's a significant improvement over the $97 million loss seen in the same period of fiscal year 2023.
Investors seem to have responded positively. While the stock price is far below the record high price of $314 per share it achieved in 2021, it still grew by nearly 25% over the last year.
Still, the declines in top-line revenue growth are not expected to stop in the upcoming fiscal year. The company's official projections call for just over $2.9 billion in revenue, which, If that forecast holds, will amount to a yearly growth rate of around 6%. It's not a crash, but any slowdown can be painful for stocks with growth-oriented investors.
Not surprisingly, the valuation may reflect some of this slowing. As a newly profitable company, DocuSign's current P/E ratio is not likely to meaningfully represent its valuation. Nonetheless, its forward P/E ratio stands at just 19, which arguably makes it more of a value stock than a growth investment.
Should I buy DocuSign?
DocuSign looks more and more like a solid buy for value investors.
Admittedly, growth stock investors will likely continue to avoid the stock as its revenue growth falls into the single digits. Such a growth rate is probably not enough of a catalyst to take it back to its record highs in the foreseeable future. Additionally, competition may keep a lid on revenue increases despite the pivot into contract lifecycle management.
However, DocuSign has turned profitable, and with revenue still rising, profits should move higher over time. Moreover, DocuSign offers the added benefit of being a document specialist, which could offer customers and investors an added level of trust over using a generalized software company like Adobe.
When investors also consider its low forward earnings multiple, they could see some potential for market-beating returns.
