As time passes, it's easy to forget how many companies saw their valuations skyrocket during the pandemic. Many investors who bought stocks in 2020 and 2021 are still seeing red in their portfolios because of how far ahead of the business fundamentals those stock prices had gotten. In addition, the psychological aspect of knowing a stock is down significantly from its high can make it difficult to see a business clearly in the present and make an investing decision that will ultimately be based on the future.
E-signature company Docusign (DOCU 0.26%) is one of these businesses. In 2020, the stock rose by 200% as investors piled into any company that might benefit from the need for social distancing. Certainly, there was high demand for the ability to sign documents electronically in those early days of the pandemic. 2021 was a different year for Docusign -- the stock fell 31%, and today, shares trade nearly 83% below their early 2021 peak. However, that's all in the past. The question for investors now is whether or not Docusign is a smart buy at today's price.
Docusign is the clear leader in its industry
It's worth acknowledging that despite the stock's lackluster performance, Docusign is by far the leader in the e-signature space. According to Deloitte, it has a 75% market share. This is due in part to the company being one of the first to bring an e-signing product to the mass market. It was able to grow its presence before many competitors jumped into the fray.
However, it's facing competition from some formidable opponents, among them, Adobe (NASDAQ: ADBE). The Photoshop maker only has a 5% market share in the e-signature niche, but it certainly has a large enough scale to have Docusign looking in the rear-view mirror.
E-signing is a growing market
In 2020, the e-signature market was estimated to be approximately $2.5 billion, and it's expected to increase to $14 billion by 2026. Assuming that estimate is even remotely accurate, Docusign stands to see significant growth even if it doesn't increase its market share at all.
As encouraging as these market size estimates are, Docusign sees an even larger total addressable market of $50 billion in areas that go beyond simply signing documents digitally. Docusign's AIM Contract Lifecycle Management software is meant to increase its value proposition for customers by allowing them to more easily manage contracts.
This offering certainly expands the use case for Docusign and distinguishes it from competitors, but it remains to be seen if this will expand the company's total addressable market to the degree that management claims.
Some positive trends
Part of the reason that Docusign's stock fell over the past few years was that its growth slowed. During much of the pandemic, Docusign was posting revenue and customer growth in the 40% to 50% range. In its most recently reported quarter (Q1 of fiscal 2025), revenue increased by 7%, and total customers grew by 11%. Those growth rates are nothing to write home about, which helps explain why the stock trades for significantly less than it did.
On the flip side, there have been some positive developments over the past several quarters. Consider the improvement in net income and free cash flow over the past three years.
DOCU Net Income (TTM) data by YCharts.
To see Docusign turn sustainably profitable and increase its free-cash-flow generation even as revenue growth has slowed is certainly encouraging. This also makes sense. As the company grows, it should be expected that it will benefit from economies of scale.
The bottom line for investors
Docusign currently trades for 4 times sales and 12 times free cash flow, both of which are significantly lower multiples than it carried a few years ago. For investors who believe Docusign has a competitive advantage that distinguishes it from its rivals, its recent profitability and cash-flow trends could indicate better days are ahead, which would make the stock look compelling at today's valuation.
On the other hand, revenue and customer growth have slowed consistently for two years. If those trends continue, the future will look less encouraging. It would therefore be understandable if investors wanted to wait and see when or if growth stabilizes or reaccelerates before adding this stock to their portfolios.
