Over the past six months, DocuSign’s stock price fell to $68.85. Shareholders have lost 9% of their capital, which is disappointing considering the S&P 500 has climbed by 12.9%. This may have investors wondering how to approach the situation.
Is now the time to buy DocuSign, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Is DocuSign Not Exciting?
Even with the cheaper entry price, we're swiping left on DocuSign for now. Here are three reasons we avoid DOCU and a stock we'd rather own.
1. Weak ARR Points to Soft Demand
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
DocuSign’s ARR came in at $3.39 billion in Q3, and over the last four quarters, its year-on-year growth averaged 8.4%. This performance was underwhelming and suggests that increasing competition is causing challenges in securing longer-term commitments. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect DocuSign’s revenue to rise by 6.7%, close to its 19.5% annualized growth for the past five years. This projection doesn't excite us and indicates its newer products and services will not accelerate its top-line performance yet.
3. Operating Margin Rising, Profits Up
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Looking at the trend in its profitability, DocuSign’s operating margin rose by 3.5 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 8.6%.
Final Judgment
DocuSign’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 4.3× forward price-to-sales (or $68.85 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.
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