Disappointed DocuSign Investors Watching for Signs of Post-pandemic Future

When DocuSign (NASDAQ:DOCU) posted quarterly earnings last month, investors dumped the stock after its weak revenue forecast. The firm, which thrived during the Covid-19 pandemic as electronic signature demand increased, expects to see more normalized buying patterns. And, just like that, DOCU stock is trading at half its value in the last quarter.

Docusign (DOCU) logo on building
Source: Sundry Photography / Shutterstock.com

Yet the stock is still trading at a premium, leading me to ask what happens next for shareholders after the Nasdaq correction ends?

When the Nasdaq rebounds, DocuSign’s stock snapback is a given. Still, investors need to look at the software firm’s growth prospects long after the pandemic ends.

Strong Quarter Sent DOCU Stock Lower

DocuSign stock fell by around 20% after it posted third-quarter results. Revenue increased by 42.4% to $545.46 million. On a non-GAAP earnings per share basis, the company earned 58 cents. But on a GAAP EPS measure, DocuSign lost a nickel a share.

The firm posted healthy subscription revenue of $528.6 million, up by 44% from last year. Conversely, the Q4 revenue guidance is below expectations. It may fall to as low as $557 million. Furthermore, non-GAAP operating margin of 17% to 19% suggests cost pressures and competition ahead.

For 2022, DocuSign forecast revenue of $2.083 billion to $2.089 billion. At around 10 times price-to-sales, the software stock is not over-priced. Still, billings growth in the 20% range suggests a slowdown ahead. CEO Dan Springer said that the customer buying urgency for its product is falling.

The Covid era stoked a panic for customers to have an electronic document signing solution.

Quality Time With Customers

DocuSign’s unusually strong growth during Covid hurt customer service levels. Now that business growth rates are moderating, the company will spend more time working with customers. This will increase customer retention. More importantly, it gives DocuSign an opportunity to cross-sell solutions.

The company increased its staff count in the last 18 months. Investors should watch out for a headcount reduction next. That would signal that customer acquisition is slowing more than DocuSign expected. Conversely, the firm will benefit from retaining staff levels. The easing pandemic does not change the permanent shift from paper-based contract signing to digital signatures.

CEO Springer said that DocuSign has an over-$50 billion total addressable market (TAM). It is the leading document signing solution on the market. The organizational demand for digital transformation solutions will continue in fiscal 2022 and beyond. Long-term investors should treat the upcoming quarterly slowdown as a temporary fluctuation.

Customers See High ROI

DocuSign may have a tougher time growing customers as customers get back to a normal pace of demand. This will not change the TAM but it will slow the growth rate. Fortunately, customers will realize DocuSign offers a high return on investment. Companies are on a constant search to cut costs.

Banks have a strong use case for DocuSign. During the pandemic, its staff did not need to help customers enable the solution. They previously focused on a go-to-market mindset. This drove initial sales higher. To win more business from existing customers, DocuSign needs its staff to help customer enable the solution. It has a team that will provide training activities. The enablement team will help customers implement DocuSign’s solutions sooner.

DocuSign Rating
Source: Data from Stock Rover
Analysts rate the stock a buyData from Stock Rover

According to Stock Rover’s research library, analysts lowered their rating slightly from the month before. Overall, they still consider DocuSign a stock to buy.

Once DocuSign establishes the install base, it may cross-sell. For example, customers may buy the DOCSIS Agreement Cloud solution. Investors should expect a re-acceleration of growth on strong demand for this Cloud product. In DocuSign’s investor presentation, the company showed how its product supports many business processes. As it handles the agreement processes, its Agreement Cloud allows customers to prepare, sign, act and manage documents.

If DocuSign realizes its full $50 billion addressable market, the stock’s price-to-sales multiple drops to a forward 0.5x.

Fair Value

Analysts have a $207.15 average price target for DocuSign, according to TipRanks. Investors should have a lowered expectation on the stock’s upside. The company needs revenue growing by at least 35% by FY 2026. In a five-year discounted cash flow model (EBITDA Exit), DOCU stock has a fair value of around $155 a share. The price target declines if readers raise the discount rate.

Metrics Range Conclusion
Discount Rate 7.5% – 6.5% 7.00%
Terminal EBITDA Multiple 15.5x – 17.5x 16.5x
Fair Value $144.81 – $165.40 $154.93

Model courtesy of finbox

Conservative investors may increase the discount rate to account for the Federal Reserve’s rate hike. In the model above, the assumptions are already at modest levels. After DocuSign’s stock dropped, valuations reflect for modest growth ahead.

DocuSign does not have a high bar to meet. It may post a strong quarterly earnings report sometime in the year. Customers are digitizing the business and will need to invest in its Cloud solution. Chances are good that the stock bottomed at around current levels.

On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.

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