Digital signature software business DocuSign (NASDAQ:DOCU) has been struggling over the past year as a market that’s generally friendly to tech firms has surged upward. Shares of DOCU are down more than 30 percent in the past 12 months, despite the business already being profitable and still posting respectable growth numbers. Is DocuSign undervalued now, and what could the next few years look like for the embattled stock?
DocuSign’s Earnings Reval Valuation Hint
Even with a contraction of over 30 percent under its belt, DocuSign is still far from cheap. The stock is trading at 47.5 times earnings and 4.5 times sales. Its price-to-operating-cash-flow ratio, however, is quite a bit more attractive at just 14.5. Even so, the high P/E ratio could be somewhat concerning, as DocuSign is trading at more than half again as much as the trailing earnings multiple of 30.4 that prevails in the overall S&P 500.
It’s encouraging to note that DOCU has slipped beneath the entire range of analyst price forecasts, which runs from a low of about $73 to a high of $124. From its current price of $67.79, this range of forecasts implies returns of anywhere from 7.6 percent to 82.9 percent, with the consensus target of $86.50 suggesting an upside of 27.6 percent.
DocuSign’s Revenue Under The Hood
Although its revenue growth rate isn’t as enormous as what many other tech companies are delivering at the moment, DocuSign is still expanding at a decent rate. In Q3, the business reported revenue growth of 8 percent to $818.4 million. The overwhelming majority of this revenue was subscription-based, creating a strong base of recurring revenue. Free cash flow was also a major highlight of Q3’s earnings report, as FCF rose from $210.7 million in Q3 of last year to $262.9 million, a gain of almost 25 percent.
It’s also worth noting that DocuSign has already achieved a decent level of profitability. In Q3, net income totaled $83.7 million, up 34 percent from the year-ago quarter. On a trailing 12-month basis, DocuSign has delivered a net margin of 9.6 percent, accompanied by a 15.5 percent return on equity and a 14.2 percent return on invested capital.
Looking forward, DocuSign expects revenue growth to come in at about 7 percent in Q4, putting quarterly revenues in the range of $825-$829 million. For the full year, revenue is expected to reach about $3.21 billion, representing an 8 percent growth rate compared to last year.
DocuSign has also shown a strong inclination to return cash to shareholders via buybacks. In Q3, management repurchased over $215 million worth of its own shares. With revenues rising and the business already profitable, this buyback program could provide further support to per-share earnings growth over time. Strong FCF growth could also enable DocuSign to deploy more cash to buybacks, potentially giving it an opportunity to capitalize on its own selloff.
How Much Future Growth Can DocuSign Deliver?
The real question, given DOCU’s rather high P/E ratio, is how much additional growth the business can deliver going forward. Luckily for DocuSign, it occupies a prime position in a high-growth industry that could provide it with considerable tailwinds. Currently estimated at about $13.4 billion, the digital signature market is expected to grow to over $70 billion by 2030. With a roughly 56 percent market share, DocuSign is by far the biggest player in this space, setting it up for what could be several years of extremely strong growth as digital signatures become a larger and larger part of everyday life and business.
Another positive point for DocuSign’s growth will likely be its ongoing integration of AI into its products. Of particular interest are its AI contract agents, which customers can use to analyze and summarize agreements quickly. This use of AI could create significant additional value for DocuSign customers by supporting more efficient workflows, identifying risks and allowing for more rapid closings on many types of agreements. In Q3, DocuSign also reached the milestone of 25,000 customers on its AI-powered IAM platform, with the average number of contracts per customer surpassing 5,000.
Overall, analysts are estimating that DocuSign’s earnings per share will grow at a CAGR of about 19 percent through the next 3-5 years. Applying this growth rate over five years to the current trailing 12-month EPS of $1.43, DocuSign would end up earning a little over $3.40 per share at the end of that period. Though this still puts DOCU at almost 20 times its estimated EPS in five years’ time, it’s quite likely that DocuSign’s earnings growth could extend beyond that time frame.
Is DocuSign Stock Undervalued?
While there’s little doubt that DocuSign is still trading at a bit of a premium, there’s quite a lot to like about the business at the moment. DocuSign is, by far, the largest business in a market that could grow at almost 40 percent annually through the next half-decade. Given that DocuSign is already profitable, investors also don’t have to factor multiple years of waiting for positive earnings into their valuations, a fact that distinguishes DOCU from many of the high-flying tech startups drawing attention in today’s market.
DocuSign’s financial footing may also help to alleviate some of the risk of investing in it. In addition to being strongly free cash flow generative, DocuSign has managed to significantly reduce its debt over the last few years. This has left the business with a balance sheet that features $3.98 billion in assets, including $1.31 billion in current assets, against total liabilities of just $2.00 billion.
Taking these positive factors into account, there’s a legitimate case to be made that DocuSign’s selloff has left it at least moderately undervalued. While it may take some time for the stock to turn around, and there are risks associated with paying DOCU’s earnings premium, the business itself looks like an attractive one for many reasons. Investors who are willing to take some risk and hold for the long run, therefore, may find DocuSign interesting in the wake of its 2025 selloff.
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