DocuSign: Why The Stock Is Still Overvalued, Even Now

Summary

• DocuSign is no longer a premium growth company. This is the fact that we need to embrace.
• And thinking about it in terms of bottom-line profitability leaves too much to be desired.
• DocuSign is overvalued for what's on offer. Paying 40x non-GAAP operating profits is too high a multiple.
• DocuSign has a $200 million share buyback program, that will make no meaningful difference to the number of shares outstanding.
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Investment Thesis

DocuSign (NASDAQ:DOCU) is a fallen angel. What's more, given the results we've seen from some notorious stay-at-home winners like Netflix (NFLX) and Snap (SNAP) last week, we can now see that these companies didn't accelerate the digital transformation, but instead pulled forward the digital transformation.

With this in mind, I believe that DocuSign will struggle to offer investors a compelling risk-reward, even from this price point.

Despite being bearish on the name for months, I don't believe there's any light at the end of the tunnel here for investors. Investors must be more than business analysts. Investors must think through valuations, right now, more so than in a long time.

Here's why I'm bearish on this name:

Recap From My Previous Comments on DocuSign

Back in December, I said,

The really big question here is to try to figure out what DocuSign's growth rates will be in fiscal 2023?

Analysts following the stock were previously projecting 29% CAGR. But given the weaker customer demand, I suspect that estimate may turn out to be slightly aggressive.

That being said, I do believe that 25% CAGR is reasonable. That would imply that DocuSign's revenues could possibly print $2.4 billion in revenues over the next twelve months.

This would put its stock priced at close to 14x forward sales. For context, as a typical rule of thumb, I like to pay less than half the multiple for the expected growth. So, if I'm roughly expecting 25% CAGR, I would normally want to pay less than 12x forward sales.

However, given that as I look around the market these past 4 weeks and countless high-quality names have dramatically sold off, I don't believe that it's worthwhile paying 14x forward sales for DocuSign.

DocuSign author coverage

I made those comments a few months ago. Since I made those comments the stock is down 44%. Today, despite being down so much I still don't believe this stock is attractive.

Revenue Growth Rates Point in the Wrong Direction

DocuSign revenue growth rates

DocuSign is meant to be a growth company. But the graphic above sees its revenue growth rates point in the wrong direction. The problem is that its strongest revenue growth rates are now in the rearview.

Furthermore, investors are undoubtedly hoping that management is lowballing estimates to allow for an easy beat. However, consider the following table.

DocuSign 10-K

As you can see above, approximately 23% of DocuSign's revenues come from international sources, with Europe being a big driver of these revenues.

But as you know, the events in Ukraine have had a knock-on impact on Europe's economic growth over the past few months.

This means that rather than DocuSign's International revenues being a contributor to its consolidated revenues, I make the argument that DocuSign's International revenues this upcoming quarter will be a detraction from the overall growth that DocuSign will post in fiscal Q1 2023 (this current quarter).

In practical terms, this means that over the coming weeks analysts are to be downwards revising their financial models, and issuing lower price targets for DocuSign's shares.

As an investor, that's not a good position to be in, on the wrong side of analysts' calls.

Unimpressive GAAP Profitability

If you've read my work before, you'll have seen me say on countless occasions, that if you want to outperform the market you have to be willing to change your investment strategy along with the market. That's hard work. It's your ability to accept new ideas that will work for your benefit.

Back in 2021, investors didn't really mind that stocks made nearly all their profits only once stock-based compensation was added back.

But in 2022, the investment community is pushing back. Investors now demand clean profitability. And DocuSign can't offer investors that.

What's more, with DocuSign's stock falling more than 60% in 12 months, DocuSign's ability to retain c-suite executives by paying them with stock-based compensation will be ineffective. Why?

Because executives are thinking the same as you. The climb from where the stock is now, back to where it was last year is probably going to take me 3 or 4 years. That's a long time. Investors thought their compensation package was going to be a lot bigger than it is. That does something for morale in the team.

Consequently, if you want to retain executives you are now going to have to start paying them with a lot more stock-based compensation to incentivize executive retention.

This leads me to highlight that DocuSign has a $200 million open-ended share repurchase program. For context, if this happened to be deployed in full over the next twelve months, even though it won't be deployed in full, as you know, we are still talking about 1% return to shareholders.

When you consider that stock-based compensation amounted to more than $400 million over the previous fiscal year, this share repurchase program won't even meaningfully offset the stock-based compensation that management gets.

DOCU Stock Valuation -- Not Worth 40x Non-GAAP Operating Profits

Investors are asked to pay 7x forward sales for a business with compressing revenue growth rates. I struggle to see how that's a compelling valuation in light of everything we've discussed?

The thing with growth companies is that they have to grow. And when they are in growth mode, they get a lot of positive operating leverage and the multiples that investors are willing to pay for the expands.

But when companies are in growth mode, a lot is forgiven. But when companies starts to report slowing growth rates, and appear to be maturing, investors focus rapidly moves beyond their top line, and investors start to consider what sort of multiple they are asked to pay on the bottom line?

Right now, investors are asked to pay approximately 40x non-GAAP operating profits, for a business that's growing at approximately 20% CAGR?

I struggle to find this a compelling valuation.

The Bottom Line

DocuSign's management team doesn't hold a lot of equity in the company.

DocuSign proxy statement

This table is updated to 15 March 2022. CEO Dan Springer has bought some more stock in the company since then, but no other commitment by anyone else in the c-suite. In fact, nobody else in the company has bought any shares in the past 12 months.

If management isn't buying into the stock here, at this point, it hardly spells of value for anyone else to buy into DocuSign's vision. I'm confident you'll agree with my assertion.

That's why I'm looking to other areas of the market and finding much easier investments. Whatever you decide, good luck and happy investing.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.