One month after the crash, it’s time to reassess DocuSign
Sthe tocks that were made by COVID-19 will fade with the virus. This seems to be the most common explanation for why DocuSign (NASDAQ: DOCU) the stock grew rapidly in 2020 but declined sharply in 2021.
The market may be volatile, but DocuSign must continue to operate regardless of investor sentiment. It will not be easy to regain the trust of stakeholders, as working from home already felt “last year” last year.
Although a closer look at the financial data does suggest that DocuSign could be on the road to profitability. In addition, a broader expansion into what the company calls the “future of agreements” indicates a much needed diversification of DocuSign’s revenue streams.
Image source: Getty Images.
Sign of the times
The evolution of the DocuSign share price is the only proof an investor would need to show that the company has gone from being a darling of the market to that of a struggling asset. Surprisingly, the stock rose from $ 75 in early 2020 to a high of $ 315 in mid-2021, only to plunge to $ 135 in November.
Was this an overcorrection, however? As Royston Yang, another Motley Fool contributor, DocuSign, “has released a series of sparkling results for its fiscal third quarter 2021,” but investors still backed down.
Indeed, there was sparkle in the figures:
- 42% year-over-year revenue growth
- 44% growth in subscription revenues
- Billing up 28%
- 79% GAAP gross margin
- Free cash flow of $ 90 million versus $ 38.1 in the previous year quarter
Still, DocuSign stock plunged 38.2% in December. Obviously, Wall Street wasn’t particularly impressed with the company’s fourth-quarter forecast, which forecasted revenue of $ 557 million to $ 563 million, a modest increase from the $ 545.5 million. third quarter dollars.
I cannot subscribe to this
Apparently, Wall Street’s expectations of DocuSign were so high that being good wasn’t enough. But sell-side traders may have missed some of the more encouraging data points.
In particular, DocuSign is rapidly moving towards profitability. The company’s loss in net income fell from $ 58.5 million in the third quarter of 2020 to just $ 5.7 million in the third quarter of 2021. In addition, DocuSign’s net loss of $ 170.9 million on the first nine months of 2020 has been reduced to $ 39.5 million in the first nine months of 2021.
For the most part, these improvements in bottom line are due to increases in income, not reductions in expenses. What could be problematic for DocuSign, however, is the company’s over-reliance on just one type of revenue. Of the $ 545.5 million in third quarter revenue, $ 528.5 million was subscription revenue (roughly 97%). An equally unbalanced ratio (also around 97%) can be identified throughout the first nine months of 2021.
DocuSign software suite subscriptions and access to customer support typically range from one to three years. It is therefore reasonable to fear that some customers will not recover if the trend towards working from home subsides in the post-pandemic era.
Cloud management of agreements
Fortunately, a new commercial extension could allow DocuSign to reduce its reliance on electronic signature software subscription renewals. With DocuSign Ventures, the company seeks to nurture entrepreneurs and start-ups that “are changing the future the way we all agree.” Thus, DocuSign could transform itself into a venture capitalist / angel investor in order to develop the “cloud of agreements”. Investing in digital disruptors can be a risky business, but at least DocuSign is branching out and preparing for a time when its core services are less relevant.
In its press release announcing Ventures, DocuSign teased investors with clues about the types of companies that might be targeted for funding. These include digital payment platforms, artificial intelligence and smart contract technology, legal automation and compliance technologies, and even vertical solutions in areas such as mortgages and the loans. Each of these areas could be bundled with existing DocuSign electronic signature solutions. So maybe Ventures doesn’t venture too far.
Pick up the pieces
Post-crash and post-pandemic crisis, DocuSign stock is cheaper and more or less attractive, depending on one’s perspective. The recently released tax numbers weren’t terrible, although DocuSign’s targeted business model is clearly on display, as is the company, as subscription revenues could dry up over time.
However, DocuSign is apparently poised to address this weakness by investing in promising and potentially transformative small businesses. It remains to be seen whether the “deal cloud” is an area worthy of venture capital – and DocuSign shareholders will be watching closely, no doubt.
None of this represents something prudent investors can hang their hat on, unfortunately. Now more than ever – and even at its significantly reduced price – DocuSign stock remains speculative. It will likely be a toy for traders with an appetite for risk and a penchant for technology that is not fully appreciated today but could become mainstream soon enough.
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David Moadel has no position in the stocks mentioned. The Motley Fool owns and recommends DocuSign. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.