Shares of eSign service provider DocuSign (DOCU) have gained 16.3% over the past month thanks to its better-than-expected revenue and earnings in the third quarter. Given the uncertain macroeconomic environment, the company expects a slower start to next year. However, its total addressable market (TAM) remains enormous. Therefore, it could be worth adding the stock to your watchlist now. Read more….
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Tech stocks have endured a challenging year due to the Fed’s aggressive interest rate hikes. The tech-heavy Nasdaq Composite has declined 32.9% year-to-date.
Shares of leading electronic signature (e-sign) provider DocuSign, Inc. (DOCU) have fallen ever more than the Nasdaq Composite. It has declined 64.6% in price year-to-date and 65.7% over the past year to close the last trading session at $53.90.
After gaining significantly during the pandemic, DOCU has delivered massive negative returns this year. Its electronic agreements and signatures helped generate exceptional revenues during the pandemic, but these services lost momentum with the reopening of offices.
However, DOCU’s stock has recently gained as it reported better-than-expected EPS and revenue in the last reported quarter. Its EPS beat the consensus EPS estimate by 34.2%, and its revenue came 2.9% higher than the analyst estimates. Allan Thygesen, CEO of DOCU, said, “We delivered solid third-quarter results and are pleased with the continued progress against our critical priorities.”
DOCU’s billings rose 17% year-over-year to $659 million in the third quarter, while its non-GAAP operating margin came in at 23%. Its total customers at the end of the third quarter came in at 1.32 million, adding 42K new customers in the last quarter. Its Enterprise & Commercial Customers came in at 202k, compared to 170K in fiscal 2022.
Moreover, its total customers, with more than $300K in Annualized Contract Value (ACV) in the last quarter, came in at 1,052, rising 34% year-over-year. For fiscal 2023, the company expects its total revenue to come in at $2.49 billion. Its billings are expected to come between $2.62 to $2.63 billion. Also, its non-GAAP operating margin is expected to come between 18% to 20%.
On September 28, 2022, DOCU announced that it would lay off 9% of its workforce as part of its restructuring plan. The restructuring plan is expected to support DOCU’s growth and profitability objectives and improve its operating margin.
DOCU expects a slow start to fiscal 2024, with its total revenue growth in the high single digits while its billings are expected to grow in the low single digits. For next year, the company expects to operate at the lower end of its long-term operating margin range of 20% to 25%.
Here’s what could influence DOCU’s performance in the upcoming months:
Mixed Financials
DOCU’s total revenue increased 18.3% year-over-year to $645.46 million for the third quarter ended October 31, 2022. The company’s non-GAAP gross profit increased 19.6% year-over-year to $537.66 million. Its non-GAAP subscription profit increased 17.6% year-over-year to $536.06 million. Also, its non-GAAP income from operations increased 20.4% year-over-year to $147.05 million.
On the other hand, DOCU’s non-GAAP net income declined 2.4% year-over-year to $118.13 million. Its non-GAAP EPS came in at $0.57, representing a decline of 1.7% year-over-year.
Mixed Analyst Estimates
Analysts expect DOCU’s EPS for fiscal 2023 to decline 2.6% year-over-year to $1.93. On the other hand, its EPS for fiscal 2024 is expected to increase 11.6% year-over-year to $2.15. Its revenue for fiscal 2023 and 2024 is expected to increase 18.5% and 7.9% year-over-year to $2.50 billion and $2.69 billion, respectively.
Stretched Valuation
In terms of forward non-GAAP P/E, DOCU’s 27.95x is 53.5% higher than the 18.21x industry average. Likewise, its 4.29x forward EV/S is 76.3% higher than the 2.43x industry average. And the stock’s 18.58x forward P/B is 421% higher than the 3.57x industry average.
Mixed Profitability
In terms of the trailing-12-month EBIT margin, DOCU is negative compared to the 6.62% industry average. Its trailing-12-month net income margin is negative compared to the 3.25% industry average.
On the other hand, its 78.38% trailing-12-month gross profit margin is 57.9% higher than the industry average of 49.64%. In addition, its 28.78% trailing-12-month levered FCF margin is 284.3% higher than the industry average of 7.49% industry average.
POWR Ratings Reflect Uncertainty
DOCU has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. DOCU has a C grade for Sentiment, in sync with its mixed analyst estimates.
It has a D grade for Stability, consistent with its 1.09 beta.
DOCU is ranked #5 out of 27 stocks in the Software – SAAS industry. Click here to access DOCU’s Growth, Value, Momentum, and Quality ratings.
Bottom Line
Despite the macroeconomic challenges, DOCU announced better-than-expected revenue and earnings in the third quarter. Its workforce reductions and disciplined spending drove a solid non-GAAP operating margin in the third quarter.
Although the company believes its Total Addressable Market is vast, it expects a slower start to fiscal 2024, with its operating margin coming in at the lower end of its long-term target.
Given its mixed financials, mixed analyst estimates, and mixed profitability, it could be wise to wait for a better entry point in the stock.
How Does DocuSign, Inc. (DOCU) Stack up Against Its Peers?
DOCU has an overall POWR Rating of C, equating to a Neutral rating. Therefore, you might want to consider investing in other Software – SAAS stocks with a B (Buy) rating, such as Park City Group, Inc. (PCYG), Informatica Inc. (INFA), and The Descartes Systems Group Inc. (DSGX).
DOCU shares rose $0.12 (+0.22%) in premarket trading Tuesday. Year-to-date, DOCU has declined -64.61%, versus a -18.07% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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