Digital signature giant DocuSign (NASDAQ:DOCU) is now trading at around $80 per share after once having commanded a price tag of over $310.
Although investors who bought the stock in triple-digit territory have seen their investments eroded, DocuSign as a business could still be worth a look.
Is DocuSign stock finally a buy, or is the business still too uncertain to invest in?
Docusign’s Turn Toward Profitability
While DocuSign shares have fallen drastically since they peaked in near the turn of the decade, the business itself has gone in a very different direction. DocuSign’s revenues have marched steadily upward, with the business reporting positive revenue growth in every quarter of its public history to date. Net losses, meanwhile, gradually shrank until the business achieved profitability.
DocuSign’s positive trajectory kept going in Q1, with quarterly revenues rising 8 percent year-over-year to $763.7 million and GAAP EPS coming in at $0.34. The business also maintains a strong balance sheet, with total liabilities of $1.9 billion weighed against total assets of $3.9 billion. On a related note, DocuSign’s return on equity in the last 12 months has been particularly strong at over 60 percent.
For the full year, DocuSign is expecting to report revenues of $3.1 billion with a non-GAAP gross margin of about 81 percent. Crucially, the vast majority of the revenue management expects to generate is from subscriptions, giving the business a stable and predictable revenue base on which it can keep building.
In addition to its current profitability, DocuSign is expected to keep seeing its EPS grow in the years to come. On a 3-5 year basis, analysts are calling for annualized earnings growth of around 13.5 percent. This level of growth, though perhaps not massive, is likely to provide the stock with significant upward momentum and allow it to keep pace with or outperform historical market averages.
Of particular note on the forward growth front is DocuSign’s ongoing investment in leveraging AI technology. The business is increasingly building AI into its workflows to speed up contracts and reduce risk for its customers. AI will likely play a key role in the digital signature and agreement ecosystem in the coming years, and it appears that DocuSign is getting out in front of that trend and establishing a solid lead for itself in leveraging new technologies.
Is DocuSign’s Moat Intact?
One very important question to answer about DocuSign is whether and to what extent the business has a moat around it.
Fortunately for shareholders, DocuSign still commands an estimated 54 percent of the digital signature market. The next closest competitor, SignRequest, trails substantially at less than 12 percent.
This competitive advantage could prove extremely important to DocuSign’s future prospects. Current estimates suggest that the digital signature market will grow at a compounded rate of 38.5 percent annually from 20204 to 2030, eventually topping out at over $70 billion.
If DocuSign can maintain its foothold as by far the largest business in this space, the growth of the industry over the next several years could result in very large improvements in both its top and bottom lines.
Is DOCU Trading at a Fair Value?
While investors who bought at the stock’s highest prices overpaid by very large margins, DOCU appears to finally be trading at a reasonable value.
Shares of DocuSign are priced at 15.1x earnings, a good bit lower than the sector average of 23.6. This low P/E, however, may be somewhat deceptive.
DocuSign posted one quarter of disproportionately high GAAP earnings in Q2 of last year, skewing trailing 12-month EPS up significantly. Even on a forward basis, though DocuSign’s P/E is only about 22.4.
DocuSign’s price ratios to sales and book value are also somewhat high at 5.6 and 8.0, respectively. Even so, it’s worth noting that DocuSign’s current P/S ratio isn’t out of line compared with its history over the last few years.
With revenue still growing and the digital signature market expected to expand quickly over the coming years, this premium to current sales may be reasonably justified.
DocuSign is also trading toward the lower end of its price range as projected by analysts. The average price target for DOCU is $88.63, implying an upside of about 11 percent from the most recent price of $79.87.
Importantly, though, the lowest price target that has been offered for DocuSign is $76, suggesting that analysts currently see much more potential upside than downside in the stock.
Is it Finally Time to Buy DocuSign?
Despite the difficulties it has faced in the past, DocuSign may finally be at a point where it could be a positive addition to a portfolio.
DocuSign’s impressive revenue growth history, turn toward profitability, ongoing positive results and large market opportunity in the coming years all seem to bode well for the business and, by extension, the stock. While DOCU may not be trading at a steep discount at the moment, the stock does appear to be in a more or less fair price range from which it could rise steadily as the business grows.
Another positive to DOCU at the moment is the fact that management is pursuing a fairly generous share buyback program.
In Q1, DocuSign bought back nearly $185 million of its own shares and added $1.0 billion to its share repurchase authorization. This brought the total remaining authorization to $1.4 billion, which is almost 9% of DocuSign’s current market cap of $16.1 billion.
Taken together, these factors may combine to finally make DocuSign a business worth buying. Although the stock has proven quite volatile over time, the combination of fundamental improvements and rocky share prices could create room for potential long-term upside.
DocuSign still has its risks, especially if the market for digital signature software doesn’t grow as explosively as it’s currently expected to. As the dominant business in its space, though, DocuSign seems likely to capture revenue growth over the coming years that will likely help it gradually improve its bottom-line performance.
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