Shares of Docusign (DOCU 0.15%) are down about 17% from their recent peak in May 2024 and about 84% from their all-time high in late 2021. You wouldn't know it by looking at the company's stock chart, but sales have been rising since the stock price's bottom fell out.
Could Docusign be a smart stock to buy at these beaten-down prices? To find out, it's important to compare the reasons it could outperform over the long run vs. some of its challenges.
Why Docusign tanked
Docusign's market capitalization peaked above $61 billion in 2021. This was way too high for a company that had less than $2 billion in annual sales at the time.
Trailing-12-month revenue increased to $2.8 billion, but this growth hasn't been fast enough to meet previous expectations.
In early June, Docusign stock fell further, thanks to a disappointing revenue outlook. Management predicted subscription revenue would reach $2.85 billion in fiscal 2025 at the midpoint of its guidance range. That's only about 6% more than the company reported in fiscal 2024.
Reasons to buy Docusign stock now
Businesses with annual revenue growth at a mid-single-digit percentage can still produce market-beating gains for patient investors if they have healthy profit margins. Thanks to significant cost-cutting, Docusign reported a 28.5% adjusted operating margin in its fiscal first quarter. Management expects its healthy adjusted operating profit margin to decline only slightly to a range between 26.5% and 28% for all of fiscal 2025.
The company's early lead in the agreement-management industry is a big advantage these days. Docusign's oldest clients have a lot of documents stored on its servers, and switching the management of those documents to a competing service is a daunting task most choose to avoid. As a result, the company reported a 99% net dollar retention rate in its fiscal first quarter.
Retention improved slightly in the first quarter. The company's new Intelligent Agreement Management platform could help this encouraging trend continue.
Based on commonly used valuation metrics, Docusign looks like a bargain. The stock is trading for 11.8 times trailing free cash flow. This low valuation means the stock market expects profits to rise at a low single-digit percentage over the long run. Management expects revenue to grow by about 6% this year, or a little faster than it needs to grow to justify its present valuation.
Reasons to remain cautious
If you want to send documents electronically, Docusign is one option among many. One of those competitors, Adobe (ADBE 0.34%), has deep pockets and already sells heaps of non-document-related subscriptions to a diverse range of businesses that also need agreement-management services.
Docusign has reported decelerating sales in recent years, but Adobe's document cloud is performing better than ever. In the first quarter, Adobe reported Document Cloud revenue that soared 18% year over year to $750 million. That's about 6% more document-related revenue than Docusign reported in its fiscal first quarter.
Adobe is the company that invented the PDF file format that most agreement-service documents are written on, so its lead in the agreement industry seems likely to grow.
A buy now?
If we focus entirely on past performance and valuation metrics, Docusign looks like a terrific bargain at its beaten-down price. Factor in its decelerating sales growth and the recent success of its strongest competitor, though, and the future doesn't look so bright.
While I expect Docusign to retain many of its largest clients, signing up new sources of recurring revenue will get more difficult now that it's the second-largest member of the agreement industry. It's probably best to avoid Docusign stock until we see signs that it can continue to grow profits while competing with the new industry leader.
