We are now far removed from the worst of the COVID-19 pandemic, and for companies like DocuSign (DOCU 1.21%), that requires a substantial transition. The leader in e-signature and digital document technology experienced soaring growth in the work-from-home economy, but now it's focusing on building a more sustainable business.
That means managing costs more carefully to achieve profitability, which has eluded the company since it went public in 2018. It's on track to hit the mark with its bottom line currently in positive territory through the first three quarters of fiscal 2024 (ending Jan. 31, 2024).
DocuSign's stock is incredibly cheap at the moment going by two traditional valuation metrics, so it might be an enticing buying opportunity for investors.
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DocuSign remains a key technology provider for millions of businesses
DocuSign is a pioneer of the e-signature industry, and it stands alone as the largest player to this day. But the company has expanded significantly from that one-dimensional business; its Agreement Cloud platform now features more than 12 applications designed to help businesses manage different parts of the contract lifecycle.
DocuSign serves its customers at every step of the agreement journey, including drafting, negotiating, identity verification, and signing -- and it all happens digitally, which is why the company experienced so much success during the pandemic. DocuSign currently serves over 1 billion users worldwide, including 1.47 million paying customers.
The growing adoption of artificial intelligence (AI) is a game changer for DocuSign. It already offers an application called Insight, which analyzes contracts to spot potential risks and opportunities. This can save businesses substantial amounts of money on legal fees.
DocuSign also recently launched a division called AI Labs. It's an experimental platform outside the regular DocuSign ecosystem where customers can test different AI functions and offer feedback to the company on where AI would be most beneficial. Over time, this platform will help DocuSign develop and deliver powerful new features.
DocuSign is tracking for its first profitable year
Losing money is a feature of many modern technology companies, especially in their growth phase. Investors encourage them to spend heavily on customer acquisition and expanding their product offerings, even if it means sacrificing profits. Once they achieve scale, the goal is to trim those operating costs to swing their bottom line into positive territory.
During fiscal 2019 (ended Jan. 31, 2019), DocuSign saw a net loss of $426 million. That number has steadily trended down since then, with some help from a significant revenue increase during the pandemic. The company's net loss narrowed to $97 million in fiscal 2023 (ended Jan. 31, 2023).
Careful expense management has also played a key role. Between fiscal 2019 and fiscal 2023, DocuSign increased its operating costs by 121%, but its revenue grew by a much faster 259%. That allowed more money to flow to the bottom line.
Now, DocuSign is three quarters into fiscal 2024, and it has delivered net income of $47 million so far. That places it on track to deliver its first ever full-year profit, assuming there are no downside surprises in the fourth quarter.
But bottom-line success has come at a price. DocuSign expects to deliver $2.75 billion in revenue for full-year fiscal 2024, which would represent a year-over-year growth rate of just 9%. That would be the slowest pace of annual growth since the company went public in 2018. Unfortunately, cutting back on costs like sales and marketing reduces the company's ability to find new opportunities to generate revenue.
NASDAQ: DOCU
Key Data Points
Is DocuSign stock a buy now?
DocuSign's stock has plunged 84% from its best-ever level, which was achieved at the height of the pandemic during 2021. The company now has a market cap of just $10.1 billion, and based on its $2.75 billion in estimated fiscal 2024 revenue, that places its stock at a price-to-sales (P/S) ratio of just 3.7. That's the cheapest P/S valuation in DocuSign's five-year history as a publicly-traded company.
For investors who focus on non-GAAP (generally accepted accounting principles) profitability -- excluding one-off and noncash expenses like stock-based compensation -- the company is on track to deliver $2.65 in earnings per share in fiscal 2024. Based on its current stock price of $49.73, it's trading at a price-to-earnings (P/E) ratio of 18.8. That's a 34% discount to the 28.7 P/E of the Nasdaq-100 technology index, which means DocuSign is also cheap relative to the broader market.
From a valuation perspective, it's hard to go wrong buying DocuSign stock right now. Investors are getting a great price. Slowing revenue growth is a concern, but the company has almost $1.6 billion in cash and short-term investments on its balance sheet, so it has the flexibility to invest more heavily in growth-oriented initiatives like sales and marketing once the broader economy improves.
I don't think DocuSign stock will revisit its all-time high at any point in the near future, but there is a strong case for upside from where it trades right now.
