DocuSign (DOCU 3.82%) was one of the best-positioned companies to benefit from the pandemic. The company's e-signature platform boomed as industries that had resisted the technology had little choice but to adopt it. Its revenue soared 49% in fiscal 2021 and 45% in fiscal 2022.
A combination of the waning of the pandemic and increased e-signature competition has since put a chill on DocuSign's growth rate. Revenue rose by 7% year over year in the first quarter of fiscal 2025, and the company's full-year outlook calls for growth of just 6%.
NASDAQ: DOCU
Key Data Points
A new platform with the same ideas
If you haven't followed DocuSign at all over the past few years, you would think that the company vastly altered its strategy in April when it announced its Intelligent Agreement Management, or IAM, platform. DocuSign claims this platform opens up an entirely new software-as-a-service category.
The IAM platform aims to help customers create and manage agreements. It has artificial intelligence baked in, and the company is launching applications for specific verticals built on top of the platform. The company has already launched applications for sales and customer experience, and applications for procurement and human resources are on their way. There's also a customizable "core" version for use cases that don't fit any of those applications.
If this all sounds kind of familiar, that's because DocuSign has already tried and mostly failed to branch out into contract lifecycle management. The company launched its Agreement Cloud platform back in 2019, which added various services on top of e-signatures. The Agreement Cloud handled agreement preparation and management, and it integrated with a wide variety of third-party systems.
The problem is that the Agreement Cloud hasn't seemed to take off. The company never disclosed concrete figures for the business, and as far as I can tell, it looks like this new IAM platform either replaces the Agreement Cloud platform or is simply a rebranding. The company said that revenue growth for the platform outpaced overall revenue growth in the fourth quarter of 2024, but without knowing the size of the business, that comparison isn't very meaningful.
The bottom line is that DocuSign has been attempting to diversify into agreement management for the past five years. The inclusion of AI-powered features and purpose-built applications for specific verticals could help adoption this time around, but IAM is very much just more of the same from DocuSign.
Not as cheap as it looks
DocuSign's growth isn't going to accelerate this year, based on the company's outlook. The company is valued at about $10.7 billion, or just over 3.5 times revenue guidance.
DocuSign is profitable on a generally accepted accounting principles (GAAP) basis and generates plenty of free cash flow, and the stock doesn't look unreasonably priced. The company generated about $888 million in free cash flow last year, which puts its price-to-free cash flow ratio at about 12. However, there are a few problems.
First, the bulk of DocuSign's free cash flow stems from the enormous amount of stock-based compensation the company doles out. This dilutes shareholders and should not be ignored as an expense.
Second, selling a complicated platform like IAM may require heavier sales and marketing spending. DocuSign announced a cost-cutting plan in February that involved laying off 6% of its workforce. Both reducing costs and accelerating growth at the same time is a tall order.
Five years after launching its Agreement Cloud, DocuSign is still searching for a viable second act. IAM doesn't represent a significant strategy shift, so to invest in DocuSign today, you'd need to believe that a sprinkling of AI will be enough to turn the tide. That seems unlikely to me.
