DocuSign, Inc.'s (NASDAQ:DOCU) Business Is Trailing The Industry But Its Shares Aren't

You may think that with a price-to-sales (or "P/S") ratio of 5.7x DocuSign, Inc. (NASDAQ:DOCU) is a stock to potentially avoid, seeing as almost half of all the Software companies in the United States have P/S ratios under 4.6x and even P/S lower than 1.7x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

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View our latest analysis for DocuSign

How DocuSign Has Been Performing

DocuSign could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Keen to find out how analysts think DocuSign's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like DocuSign's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.8% last year. Pleasingly, revenue has also lifted 41% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 7.4% each year as estimated by the analysts watching the company. With the industry predicted to deliver 16% growth per year, the company is positioned for a weaker revenue result.

With this information, we find it concerning that DocuSign is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Final Word

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've concluded that DocuSign currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for DocuSign you should know about.

If these risks are making you reconsider your opinion on DocuSign, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.