Stock Analysis

The Selling in DocuSign (NASDAQ:DOCU) May have Created an Opportunity for Long Term Investors

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Shares of DocuSign, Inc. (NASDAQ:DOCU) fell more than 40% on Friday after the company reported quarterly results that pointed to a slowdown in growth. The stock price is now off the lows, but remains more than 50% below the all time high recorded just three months ago.

Year-on-year revenue growth of 42% was still relatively strong and comfortably ahead of consensus. Normalized EPS of 58 cents were also better than expected and 163% higher than a year earlier. On a GAAP basis,  the net loss per share narrowed to $0.03 from $0.31 a year ago.

The downside came in the form of billings that grew 28% YoY, down sharply from 48% in the previous quarter. Fourth quarter revenue guidance implied revenue growth will fall to 29%, while billings are also expected to be lower than analysts had expected.

View our latest analysis for DocuSign

What is DocuSign worth?

The 42% drop in the share price was probably a combination of unlucky timing,  lower than expected guidance, and the fact that DocuSign is not yet profitable. Last week the market shunned growth stocks and particularly those that are not profitable and trading on high valuations. DocuSign ticked all these boxes which resulted in aggressive selling. But this may have created an opportunity for investors with a longer time horizon.

DocuSign’s net income is negative which means we cannot calculate a price-to-earnings (P/E) ratio. However, the company is generating positive free cash flow, as indicated by the chart below. This means we can calculate a price-to-cash flow ratio, and that ratio is now around 60x. This is still high, but in line with companies with similar growth rates.

NasdaqGS:DOCU Earnings and Revenue Growth December 8th 2021

Our estimate of DocuSign’s fair value based on forecast future cash flows is $180.60, (you can find out more about this calculation here). This implies the stock is now trading at a modest 23% discount - however, these forecasts may well be revised slightly lower now that guidance is softer.

The Bottom Line on DocuSign

It appears that the 50% decline in DocuSign’s share price has brought the stock back to a reasonable valuation. One of the reasons for this is the net loss which makes the company appear less profitable than the positive free cash flow suggests. The share may not be a bargain at the current price, but it may have less downside risk than other software stocks that are trading at substantial premiums.

There are however three other factors to be aware of:

  • Shares of software companies are currently being driven by sentiment more than anything else. This can create opportunities, but it's also a risk to keep in mind.
  • Shareholders have been diluted in the past and stock-based compensation means there will be further dilution in the future.
  • There has been some insider selling in the past year, although this selling did occur at much higher prices. We would be more concerned if insider selling continued at current levels.

To learn more about DocuSign have a look at our comprehensive analysis of the company.

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Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article 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.

Richard Bowman

Richard Bowman

Richard is an analyst, writer and investor based in Cape Town, South Africa. He has written for several online investment publications and continues to do so. Richard is fascinated by economics, financial markets and behavioral finance. He is also passionate about tools and content that make investing accessible to everyone.

About NasdaqGS:DOCU


DocuSign, Inc. provides electronic signature solution in the United States and internationally.

High growth potential and good value.