DocuSign Inc. (NASDAQ: DOCU) has had one of the most stunning falls from grace during the 2022 bear market. Since climbing above $300 a year ago, the e-signature software provider’s share price is back at pre-COVID levels.
In some ways, the company’s pandemic booster shot up the charts was more a curse than a blessing. Investors, accustomed to stellar growth numbers, decided that DocuSign’s more recent growth doesn’t cut it — and moved on to more exciting growth stories.
With the stock plummeting back towards its April 2018 IPO level, investors may want to hop on for the potential next ride up. DocuSign may scream “growth at a reasonable price” but with more downside possible in a weak market, an even more reasonable price could show up down the road. That said, is DocuSign down forever?
Growth Goes Backward
Not only has DocuSign struggled to build off phenomenal fiscal 2022 growth, but recent earnings figures have declined year-over-year. After recording quarterly EPS growth of 267%, 176%, 164% and 30% last year, the bottom line fell 14% and 6% in Q1 and Q2, respectively. Slowing growth is one thing, but negative growth can be harder to explain away to the market.
Making matters worse, things will likely go further south in the second half. Wall Street has forecasted that DocuSign will report 28% and 15% EPS decreases in the next two quarters. We have to look all the way out to the first quarter of fiscal 2024 before analysts see a return to growth, albeit off a weaker fiscal 2023 base.
Are DocuSign’s tools any less relevant than they were during the pandemic? Have we gone back to paper-based document management? Neither are true.
Instead, a normalization of demand seems to have settled in. At the same time, have learned how highly dependent DocuSign is on global business confidence and activity. When this weakens, software budgets also go down and enterprises decide that they can operate with paper-stuffed file cabinets for longer.
Fundamentals Have Weakened
DocuSign’s inability to find that next gear of growth prompted the resignation of longtime CEO Dan Springer as well as COO Scott Olrich in June 2022. This leaves the company on shaky ground as it forms a new leadership team and a new growth strategy.
The incoming CEO will inherit a set of financial statements that look vulnerable. Below peer growth and negative net margins have been the market’s primary beef, but the balance sheet may be the biggest concern. As of the end of last quarter, debt comprised 64% of DocuSign’s capital structure. This places it in the bottom quintile among its technology peers. As interest rates go up, should it need to take on additional leverage, it will have to do so at a higher cost of capital.
The good news is that DocuSign is nowhere near as expensive as it once was from a valuation standpoint. At 28x trailing earnings, the stock is roughly on par with the average tech sector P/E of 25x. Given the anticipated growth over the next 12 months, the PEG ratio isn’t exactly compelling compared to its peers.
Unfavorable Macro Environment
Aside from the recent disappointing earnings figures, management has made concerning comments about business activity slowdown. Inflation, higher rates and supply chain issues weigh on corporate outlooks and many would-be DocuSign customers have limited IT spending.
It’s also taking longer for DocuSign to attract new customers, amplifying the company’s broader macro challenges. In sharp contrast to the early COVID-19 days, when businesses were beating down the door to get digital signature solutions, a cautious, more deliberate sales process has taken over.
On the bright side, DocuSign remains the clear leader in the e-signature space, a market it basically created when it launched in 2003. Competitive threats have since emerged, but DocuSign’s foothold and brand strength have been tough to shake.
Future growth is expected to come from the expansion of the Agreement Cloud platform, which continues to spawn new product spokes across new industries. It will also come from expansion in international markets where DocuSign presently generates only about one-fourth of its revenue. While the company has traditionally focused on large enterprises, it will likely have to turn to the small business sector to help revive growth.
The long-term growth picture is still attractive but a potpourri of near-term headwinds will keep pressure on DocuSign shares for the foreseeable future. This has all the markings of a comeback story, but for now, investors may want to hold off signing any “buy” orders.