Cloud Data Center Migration Will Pressure Profit Margins In Future

Key Takeaways

• Lower revenue growth forecasts and flat dollar net retention suggest challenges in sustaining high growth and expanding customer revenue.
  
• Migration to cloud data centers and reduced early renewal volume may decrease profitability and billings growth, impacting revenue stability.
  
• DocuSign's transformative Intelligent Agreement Management platform and strategic growth in international markets indicate potential for sustained revenue growth and improved profitability.

Catalysts

Provides electronic signature solution in the United States and internationally.

• DocuSign's revenue growth forecasts for fiscal 2026 are expected to be lower than in previous years, at 5% year-over-year. This potentially reflects concerns about achieving previous high growth rates, impacting overall revenue growth expectations.
  
• The company's expectation of a gross margin headwind due to ongoing cloud data center migration efforts is likely to decrease profitability. This is expected to cause a 1% gross margin decrease and contribute to operating margin pressure, impacting net margins.
  
• Dollar net retention is expected to be flat in Q1 of 2026 and only improve moderately throughout the year. This may indicate challenges in retaining and expanding existing customer revenue, which could slow earnings growth.
  
• There are expectations of reduced early renewal volume, potentially dampening billings growth in fiscal 2026. Early renewals have previously been a source of billings acceleration, which could now affect revenue and earnings stability.
  
• The company's focus on maintaining similar operating margins to fiscal 2025, despite facing various cost headwinds, suggests limited margin expansion. This may constrain earnings growth if top-line acceleration does not materialize as expected.

DocuSign Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on DocuSign compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming DocuSign's revenue will grow by 7.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 36.5% today to 6.7% in 3 years time.
• The bearish analysts expect earnings to reach $250.1 million (and earnings per share of $1.52) by about July 2028, down from $1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 76.0x on those 2028 earnings, up from 14.9x today. This future PE is greater than the current PE for the US Software industry at 42.7x.
• Analysts expect the number of shares outstanding to decline by 0.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.9%, as per the Simply Wall St company report.

DocuSign Future Earnings Per Share Growth

Risks

• DocuSign's introduction of Intelligent Agreement Management (IAM) has been transformative, with its platform driving increased customer adoption and solidifying its position as a leading agreement platform, which could sustain revenue growth.
  
• The company's IAM platform is seeing strong momentum, quickly becoming the fastest-growing new product in DocuSign's history, suggesting potential for increased billings and subscription revenue.
  
• DocuSign has improved its profitability significantly, achieving a 29% non-GAAP operating margin for fiscal 2025, demonstrating enhanced financial efficiency and potentially stable or increasing net margins.
  
• The international and digital growth sectors are continuing to outpace the overall business, indicating future revenue streams and a significant opportunity for expansion.
  
• DocuSign has been effective in maintaining a strong customer base, with a consistent increase in large customer growth and strategic partnerships, likely contributing to steady earnings and potentially improved net margins.

Valuation

• The assumed bearish price target for DocuSign is $76.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of DocuSign's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $124.0, and the most bearish reporting a price target of just $76.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $3.7 billion, earnings will come to $250.1 million, and it would be trading on a PE ratio of 76.0x, assuming you use a discount rate of 7.9%.
• Given the current share price of $81.41, the bearish analyst price target of $76.0 is 7.1% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.