DocuSign Stock: Why I Will Not Invest In DocuSign At Current Moment (NASDAQ:DOCU)

Investment Thesis

Since the post-COVID normalization, DocuSign (NASDAQ:DOCU) has been a hot topic among investors. Often heavily scrutinized for their failed attempts to turn around the firm, including making top-leadership changes, making strategic go-to-market strategy, etc, growth has failed to recover.

On the other hand, investors appreciate the firm’s high operating margin and substantial free cash flow – higher than many software companies today- citing it as an opportunity to buy the stock at 15.3x P/E today. This has caused a severe dilemma among investors.

Additionally, news of DocuSign exploring a potential buyout has flooded the market, as well as the firm’s recent news of a new restructuring plan. Are those good or bad news?

Considering its current situation, is DocuSign a stock to consider? At the moment, I do not think so, and that’s what I’m about to go through in the article.

Not Surprisingly, It’s Failure To Recover Growth

Back in 2022, former CEO Dan Springer stepped down for current CEO, Allan Thygesen, after the firm lost 60% of its market value post-Covid. Then, the firm reported 22% YoY growth, down from a peak of 50% growth. Along with many new changes to top leadership to reignite growth, today, growth continues to plummet 7% as of 3Q24.

While a change in top leadership does not necessarily translate to immediate results, we can all agree that these implementations have not been working so far, and growth is disappointing at the very least. Additionally, management had consistently preached about its international growth opportunity, and its expansion into CLM, but the growth is not reflective of that.

Are DocuSign’s CLM Services Not Essential?

Personally, I am a user of DocuSign and a pleased customer. I appreciate the seamless document signing process it offers and recognize its importance. However, I question the necessity for my firm to adopt supplementary services beyond DocuSign’s eSignature offerings. These additional services are, at best, not as essential as other vital services.

Perhaps, the problem lies not in restructuring, but rather, customers do not see the need to adopt it, making cross-selling extremely tough. Its declining dollar net retention is a clear reflection of that.

Strong FCF, Operating Margin and Balance Sheet – Good or Bad?

Despite lackluster growth, its operating margins and free cash flow are impressive, compared to many software companies. As of 3Q24, there is $1.2 billion of cash sitting on its balance sheet – making up 11% of the current market cap of $10.55 billion.

While these are indeed impressive stats, there are opportunity costs incurred if cash is underutilized. Typically, firms enhance shareholders’ returns through buybacks, dividends, or strategic investments – what we prefer. Failing to deploy its cash effectively to generate returns higher than the cost of capital may well be considered inefficient and detrimental to shareholders.

The next question comes – what are they going to do with this cash?

Recent News of Buyout and Restructuring Plan – Good or Bad?

In Dec 2023, news of DocuSign’s exploring a buyout spread like wildfire, sparking commotions among investors as the share price rose to a high of $60 only to see it subside later as talks over a buyout stalled following a price disagreement.

Here’s a question I’m pondering, if the growth opportunity were as exciting and as lucrative, why are the firms exploring a buyout?

With strong pressures from shareholders following the lackluster performance, exploring a buyout to go private may well be, after all, a better strategic fit for DocuSign as management will not have to handle the pressure of being a public company, and be fully focused on running the company. This is also an alternative way to maximize shareholders’ value if they could command a premium well above its current market cap.

Furthermore, the recent announcement of the restructuring plan did not help either as DocuSign sought to reduce its workforce, primarily in the sales and marketing roles.

While from a cost reduction perspective, it makes sense to streamline operations and allocate resources to other high-priority areas, there are concerns about the firm’s ability to drive growth and raising doubts over DocuSign’s ability to execute the restructuring plan effectively. Thus, impacting investors’ confidence.

Valuation

From a valuation perspective, 15.3x P/E does not seem very expensive for a software company with a strong FCF, high operating margins, and a strong balance sheet. But if we were to take into consideration other factors such as multiple failed attempts to revitalize growth, perhaps the valuation is not as attractive as it seems.

Conclusion

Ultimately, as an investor, I’d like to see management investing cash in higher-return projects to drive value for shareholders.

I see lots of uncertainty about whether the firm can drive growth successfully, and recent news of buyout and restructuring further reinforce that the management has problems turning around, which makes it not an ideal investment at the moment.

What are your thoughts? Let me know in the comment section below!