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After An Overdone Selloff, It’s Time to Sign for DocuSign Shares

DocuSign, Inc. (NASDAQ: DOCU) has come full circle. After riding the remote workforce trend to the $300 level last summer, the e-signature leader has seen its share price return to...

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This story originally appeared on MarketBeat

DocuSign, Inc. (NASDAQ: DOCU) has come full circle. After riding the remote workforce trend to the $300 level last summer, the e-signature leader has seen its share price return to where it all began. Earlier this month the stock traded below $100 for the first time since April 2020 on fears that the company's best days are over.

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Like other big pandemic winners, DocuSign isn't likely to experience the growth it did in 2021. Extreme demand for e-signature among employers scrambling to go paperless drove a 49% surge in sales.

Yet the long-term outlook is as solid as ever for a software pioneer that enjoys a significant first-mover advantage. The global shift to digital document solutions was only accelerated by the pandemic. It is not going away.

The reset button has been pressed on DocuSign as if its Covid boost never happened. But with plenty of growth still ahead, investors have a great opportunity to sign up for the next big run.

Why Did DocuSign Stock Fall?

DocuSign gapped below $80 on March 11th in the wake of the company's fourth-quarter report. Revenue growth slowed from 42% in the previous quarter to 35% in Q4 and earnings per share (EPS) of $0.47 came in a dime below consensus.

The shortfall was compounded by a weak first-quarter forecast that implies 24% top-line growth. At the midpoint, management's forecast for $2.48 billion in fiscal 2022 revenue, or 18% growth, was the last straw for many investors who had grown accustomed to 40%-plus growth.

It didn't help matters that DocuSign's disappointing year-end update and outlook came at a time when the market was on edge because of the Russia-Ukraine war. Recent geopolitical risks have forced high-growth stocks to be perfect or face a barrage of selling.

What Are DocuSign's Growth Prospects?

The world's top e-signature provider is much more than the flagship software that has become commonplace in online business transactions. E-signature is at the core of what is a comprehensive document platform known as the DocuSign Agreement Cloud. It is an ecosystem that drives the preparation, signing, and management of documents from start to finish.

Despite the company's inroads, most of today's agreement processes remain manual and disconnected. In recognition of the need to reduce waste and costs, DocuSign is developing new solutions tailored to specific workflows. Faster, more efficient e-signature software for manufacturing, retail, education, and life sciences are just some of its newest offerings.

After ushering an additional 280,000 customers into the digital document age last year, DocuSign's customer base has reached nearly 1.2 million. What's more impressive than the sheer size of the customer base is the broad industry representation. From blue chip tech companies like Apple and Microsoft to healthcare giants like Roche and McKesson, DocuSign is a trusted name for the entire economy.

Much of the growth will come from overseas where DocuSign remains in the early stages of expansion. In Q4, less than one-fourth of revenue came from outside the U.S. but international revenue growth was 55%. With most of Europe, Asia, and South America yet to be introduced to DocuSign, the growth opportunities are vast.

Is DocuSign Stock a Buy, Hold, or Sell?

As CEO Dan Springer stated, workers may be returning to the office but "they are not returning to paper". This says it all.

DocuSign is still a transformative business driving the global transition to cloud-based documentation. It operates in a $50 billion market in which it has a leading position and strong brand recognition. As "Google' is to internet search, the word "DocuSign' has evolved into a verb synonymous with signing agreements electronically.

From a financial perspective, this means that DocuSign will continue to generate recurring revenue that gives investors good visibility into cash flows. Even if at a slower pace than the unusual 2020-2021 period, subscription additions from existing and new customers will only fortify these revenue streams.

In the high-margin software business, margin expansion is everything—and DocuSign is achieving it. Gross margins expanded from 79% in FY21 to 82% in FY22. Amid slowing growth, yes, but a greater portion of revenue is reaching the bottom line. Translation: increasing shareholder value.

What also screams value is DocuSign's recently announced $200 million repurchase program. This should provide a floor for the stock and keep it trending higher from the post-earnings bottom.

It shouldn't come as a surprise that DocuSign's growth is slowing. The unprecedented growth sparked by the pandemic was never going to be sustainable. More importantly, 20% growth shouldn't be dismissed nor should the length of DocuSign's growth trajectory.

Even though this long-term growth story remains intact, it remains to be seen if DocuSign can regain favor with a market that has all but labeled it a pandemic has-been. With the bar now set much lower and management's guidance more likely to get beat, buying activity could heat up fast.

Investors that take the chance and sign on the dotted line here are getting a good deal.

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