DocuSign(NASDAQ: DOCU) was once a hot growth stock, but it lost its luster as its sales growth slowed and rising interest rates compressed its valuations. The e-signature service provider's stock has declined nearly 10% over the past 12 months, and it remains more than 80% below its all-time high from September 2021.
Could this out-of-favor stock bounce back over the next year? Let's dive deeper into its near-term challenges, its turnaround plans, and its valuations to decide.
Image source: Getty Images.
What happened to DocuSign over the past year?
DocuSign controls about 70% of the global e-signature services market. It serves more than 1.5 million clients across 180 countries, and its tools can be directly integrated into over 900 popular applications. It generates most of its revenue through monthly and annual subscriptions.
From fiscal 2019 to 2022, which ended in January 2022, DocuSign's billings rose at a compound annual growth rate (CAGR) of 43% as its revenue grew at a CAGR of 44%. It experienced a significant growth spurt during the pandemic as more companies relied on digital signatures and contracts, but its growth cooled off over the past two years.
In fiscal 2023, DocuSign's billings and revenue rose 13% and 19%, respectively. In fiscal 2024, its billings increased only 9% as its revenue grew 10%. On a quarterly basis, its revenue growth constantly decelerated over the past year.
Metric | Q1 2024 | Q2 2024 | Q3 2024 | Q4 2024 | Q1 2025 |
|---|---|---|---|---|---|
Billings growth (YOY) | 10% | 10% | 5% | 13% | 5% |
Revenue growth (YOY) | 12% | 11% | 9% | 8% | 7% |
Data source: DocuSign. YOY = Year-over-year.
DocuSign mainly attributed that slowdown to the macro headwinds that drove many companies to rein in their software spending, but it also faces a lot of competition from Adobe, Dropbox, and other companies that are bundling their own e-signature tools into their cloud-based ecosystems.
To continue growing, DocuSign is relying on its higher-growth international business to offset the slower growth of its North American business. It's also expanding its Intelligent Agreement Management (IAM) platform -- which bundles together its e-signature, contract review, and workflow services -- to boost its revenue per customer.
Its planned acquisition of Lexion will add more AI tools to that ecosystem. However, DocuSign's outlook suggests those initiatives won't move the needle anytime soon. For fiscal 2025, it expects its billings to grow just 3%-4% as its revenue rises 4%-5%.
Focusing on profits instead of revenue
As DocuSign's billings growth cooled off, it aggressively cut costs to boost its margins and profits. In fiscal 2024, its adjusted gross margin rose by a percentage point to 83% and its adjusted operating margin expanded five percentage points to 26%. It also turned profitable for the first time on a generally accepted accounting principles (GAAP) basis in fiscal 2024, and its annual adjusted free cash flow (FCF) more than doubled.
For fiscal 2025, it expects its adjusted gross margin to dip to 81%-82% as it incurs some higher cloud infrastructure costs, but it also expects its adjusted operating margin to rise to 26.5%-28% as it streamlines its sales and marketing expenses. Analysts expect its adjusted EPS to increase 9% for the full year.
DocuSign's stock trades at just 16 times forward earnings, which is more comparable to the multiple of a mature tech stock than a growth stock. That low valuation could limit its downside potential, but it also doesn't make much sense to buy DocuSign's stock right now when you can invest in more diversified tech giants with comparable growth rates and valuations.
Where will DocuSign's stock be in a year?
DocuSign is still steadily growing, but there aren't any compelling reasons to buy its stock today. So over the next 12 months, I'd expect it to underperform the S&P 500 and many of its industry peers unless its top line growth accelerates again.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe, DocuSign, and Dropbox. The Motley Fool has a disclosure policy.
