Down 83% From Record Highs, Is DocuSign Stock a Buy Right Now?

DocuSign (NASDAQ: DOCU) is a company that thrived amid the pandemic. As lockdowns were imposed and businesses were shut, demand for DocuSign’s suite of services gained pace, allowing it to increase sales from $973.9 million in fiscal 2020 to $1.45 billion in fiscal 2021 and $2.1 billion in fiscal 2022.

But analysts now forecast DocuSign’s revenue growth to decelerate to 17.7% in fiscal 2023 and to 10.7% in fiscal 2024. A less than impressive growth rate, coupled with a challenging macro environment, has driven DocuSign stock lower by 83% from all-time highs, valuing it at a market cap of $10.8 billion.

So, is DocuSign stock a buy now, or will its price move lower in the next year?

An overview of DocuSign’s recent results

Founded in 2003, DocuSign accounts for 70% of the e-signature market. It ended fiscal Q2 with 1.28 million customers, an increase of 22% year-over-year. The company also provides contract lifecycle management services for human resource departments. These services are bundled together in DocuSign Agreement Cloud, which is subscription-based.

DocuSign announced its fiscal Q2 of 2023 (ended in July) results earlier this month and reported revenue of $622.2 million, an increase of 22% year-over-year. The company beat analyst estimates by $19.9 million as its billings surged 9% to $647.7 million.

DocuSign’s net income fell 8% to $90.1 million or $0.44 per share, but beat estimates that forecast the bottom line at $0.42 per share.

For the third quarter, DocuSign forecasts revenue between 14% and 15% year over year, and billings are estimated to increase between 3% and 5%. In fiscal 2023, sales are expected to increase by 18%, with billings growth forecast at 9%.

While these estimates were in line with analyst projections, it will also be the slowest top-line growth rate for DocuSign as a publicly listed company.

DocuSign stock might remain volatile

Investors expected DocuSign’s revenue growth rate to stabilize once the dreaded pandemic is brought under control. But the company now has to wrestle with macroeconomic challenges such as inflation, interest rate hikes, and geopolitical tensions.

During its Q2 earnings call, CEO Maggie Wilderotter stated DocuSign continues to experience softness in certain verticals such as real estate and financial services. These factors also lowered its net dollar retention rate to 110% in Q2 from 114% in Q1 and 124% in the year-ago quarter. 

Historically, net dollar retention rates have ranged between 112% and 119%, but DocuSign expects it to stay lower in Q3 as well. This indicates existing customers have lowered spending on the DocuSign platform in the last year.

Amid a volatile period, DocuSign will need to improve its profit margins in the future. Analysts expect adjusted net income to fall by 16.7% to $1.65 per share in fiscal 2023. But its forecast to rise by 20% annually in the next five years. It indicates DocuSign enjoys certain pricing power in the e-signature services market, despite facing competition from Adobe’s (NASDAQ: ADBE) Sign and Dropbox’s (NASDAQ: DBX) HelloSign.

Alternatively, the company is still reporting a net loss on a GAAP basis. In the first six months of fiscal 2023, DocuSign’s net losses more than doubled to $72.5 million, compared to $34 million in the year-ago period. Its stock-based compensation surged 39% to more than $252 million, accounting for a fifth of total sales.

Is DocuSign stock a buy?

DocuSign stock is valued at 4.4x forward sales and 33x forward earnings, which is quite steep. Right now, there are better cloud-based stocks trading at similar valuations. But analysts remain bullish on DOCU stock and expect shares to rise by more than 50% in the next year.

Related: Buy Stocks Now? When It’s Time, You Won’t Want To