DocuSign Stock: Bear vs. Bull

Few corporations noticed as fast adoption through the COVID-19 pandemic as DocuSign (DOCU -0.49%) after assembly in particular person to signal paperwork rapidly grew to become a factor of the previous. Since the corporate’s software program is not as vital now, signing new clients on has change into more and more troublesome. However, DocuSign has a big consumer base that is not leaving its platform, and if it could actually get these clients to broaden their spending, it might nonetheless be a worthwhile inventory to personal.

So must you personal DocuSign inventory, or is it time to maneuver on? Let’s break down the bull and bear case for DocuSign and discover out.

Bull case: Enterprise clients might drive demand

DocuSign has a large buyer base of 1.36 million purchasers. Of these, it considers 211,000 of them enterprise and industrial clients, with 1,080 spending greater than $300,000 yearly. If DocuSign can launch a product or characteristic that may be a recreation changer, a big cohort would doubtless undertake it, offering a large enhance to the corporate’s income.

DocuSign’s major focus proper now’s eSignature add-ons and contract lifecycle administration. If the enterprise can get present clients so as to add objects like identification verification or notarization, plus handle contract workflows earlier than and after the agreements are signed, DocuSign might have vital room for income progress left.

While income is not rising on the speeds it was one 12 months in the past, it nonetheless rose a good 13% to $739 million in This fall of fiscal 2023 (ended Jan. 31). Another constructive is that 98% of DocuSign’s income is subscription-based, offering some continuity and reliability of gross sales. 

The firm can be increasing internationally, with segments outdoors the U.S. rising 19% within the fourth quarter and worldwide income making up 25% of the whole. As DocuSign makes an attempt to seize eight key markets, this enlargement will likely be price watching as a result of a big quantity of enterprise is finished outdoors of U.S. borders.

DOCU Price to Free Cash Flow information by YCharts

While buyers stay cautious, there may be potential for DocuSign’s inventory to see beneficial properties. The shares commerce at 4.3 occasions gross sales — an inexpensive valuation to pay for a software program inventory with the enlargement potentialities that DocuSign has. In addition, its price-to-free-cash-flow ratio can be moderately cheap. As the corporate modifications and shifts its focus, the inventory is nearly too low cost to disregard.

Bear case: DocuSign’s progress projections are poor

While there’s a case for enterprise enlargement, DocuSign’s steering does not mirror that proper now.

Data supply: DocuSign. Note: Q1 FY 2024 ends April 30, 2024.

Revenue may be deceptive due to service income (which incorporates onboarding and buyer help). Billings give a greater image of how the precise product is promoting. Unfortunately, with low single-digit billings progress for fiscal 2024 projected, DocuSign’s enlargement technique is falling on its face.

As one other signal of the corporate’s struggles, it laid off 9% of its workforce in September and one other 10% in February. While this may be seen as a bullish argument as a result of administration is decreasing bills, there’s not sufficient income progress right here to persuade me this can be a good signal.

Additionally, DocuSign is barely worthwhile and compensates its staff closely with inventory.

DOCU Stock Based Compensation (% of Quarterly Revenues) information by YCharts

This heavy compensation invoice has taken a toll on buyers, with its excellent shares rising 11% for the reason that begin of 2020. With every share changing into diluted and controlling much less of the corporate, and progress that’s unlikely to cowl any working expense improve, DocuSign does not seem to be a powerful firm proper now.

So which camp do I fall in? I’d say I’m a short-term bear and a long-term bull. Because enterprise budgets are tight on account of expectations of an financial downturn, it is powerful to persuade clients so as to add an extra functionality to a software program package deal many corporations solely signed on to throughout the previous three years. However, after this era passes, I would not be shocked if DocuSign kicks again into progress mode as a result of its product add-ons are helpful.

So does that imply it is best to again the truck up on DocuSign’s inventory? Absolutely not. Just as a result of I assume it’s going to occur doesn’t suggest it will. I’ve already acquired sufficient publicity to DocuSign’s inventory in my portfolio and am keen to attend and see how the corporate does over the following three years. In the meantime, many higher buys do not have the identical headwinds DocuSign is coping with proper now, and it is best to contemplate these for investments as a substitute.