Docusign (NASDAQ: DOCU) has built an entire portfolio of digital document software to handle every stage of the agreement lifecycle, from contract drafting to final signatures. Its platform was a hit during the pandemic because it helped businesses close deals even though their employees couldn't physically meet.
As a result, Docusign stock soared from $80 to $310 between March 2020 and September 2021. Unfortunately, the stock has since plunged 81% from that record high, as social conditions are back to normal and Docusign's products are no longer generating the same lightning-fast growth they once were.
With that said, the company has made promising changes to adapt to its new market environment, including a focus on profitability and a pivot toward artificial intelligence (AI), which is enhancing its products even further.
As a result, Docusign stock is gradually recovering with a 47% gain from its October 2023 low point. Plus, the stock is trading flat since July 16 despite the S&P 500 (SNPINDEX: ^GSPC) index peaking and trading in the red ever since. Here's why it could be a great buy even if the broader market sell-off continues.
Image source: Getty Images.
AI brings new capabilities to Docusign
Earlier this year, Docusign launched a new platform called Intelligent Agreement Management (IAM), which is designed to solve a problem the company calls the "agreement trap." It refers to the $2 trillion in economic value lost every year due to poor contract management (according to Deloitte), and IAM uses AI to help businesses save some of that money.
IAM introduces several new software tools. Docusign Navigator is a digital repository where businesses can store all of their agreements, and it uses AI to extract data from each document. That means it knows when a contract is coming up to expiry so it can notify management, and it also allows employees to find information instantly via the search function, which saves them from digging through individual agreements.
Then there is Docusign AI, which can help businesses manage the agreement lifecycle from the initial draft to the signing process. It's capable of extracting the key points from a contract to instantly create a summary for stakeholders to read, and it can also conduct risk assessments by identifying potentially problematic clauses. Overall, this tool will help cut down on the estimated 25,000 hours each business wastes each year, on average, developing contracts.
Docusign had 1.6 million paying customers at the end of the recent second quarter of fiscal 2025 (ended July 31), which was a 16% increase from the year-ago period. It was the first quarter in which IAM was officially available, and management said it was already driving higher customer win rates with larger average deal sizes. August sales of IAM were larger than those of June and July combined, so the platform is rapidly gathering momentum.
Slowing revenue growth but a rapid increase in profits
Docusign generated $736 million in revenue during Q2 which was a 7% increase from the year-ago period. That growth rate has consistently decelerated over the past couple of years; revenue increased by 11% in Q2 fiscal 2024, and by 22% in Q2 fiscal 2023.
There are two key reasons for the slowdown. First, Docusign pulled forward a lot of growth during the pandemic and it's now trying to increase its revenue off a very large base -- in market conditions that are less favorable. Second, the company has focused on profitability rather than outright growth lately in order to improve its bottom line, which involves cutting back on costs like sales and marketing.
That pivot is working, because Docusign generated $888.2 million in net income during Q2 which was a substantial increase from the $7.4 million it delivered in the year-ago period. With that said, $816.3 million was attributable to a one-off tax benefit, but even if we exclude that, the company generated $71.9 million in net income which was still a near-tenfold improvement year over year.
On a non-GAAP (adjusted) basis, which strips out one-off and non-cash expenses like stock-based compensation (and one-off tax benefits like the one mentioned above), Docusign's net income came in at $201 million, which was a 34% increase from the year-ago period.
Docusign stock looks cheap
Docusign stock was unquestionably overvalued at its peak in 2021, with its price-to-sales (P/S) ratio hovering at around 50. Investors were pricing in a continuation of its growth from the pandemic period, which never happened, and they were also willing to pay much higher valuations for tech stocks back then because of favorable broader market conditions, which featured record low interest rates and trillions of dollars in government stimulus.
The 81% decline in Docusign stock from its peak -- combined with the company's consistent revenue growth since 2021 -- has pushed its P/S ratio down to just 4.1, which is near the cheapest level since the company came public in 2018:
DOCU PS Ratio data by YCharts
Docusign values its total addressable market at $50 billion, of which it has barely scratched the surface based on its current revenue. The IAM platform could drive greater penetration, and management thinks it's the key to reaccelerating the company's revenue growth over a multiyear period.
Based on a survey conducted by PwC earlier this year, 70% of leading corporate executives think AI will transform the way they create value in the coming three years, so adoption of platforms like IAM will likely increase substantially in the near future.
Therefore, Docusign stock might be a great long-term buy right now while it's trading near a historically cheap valuation.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Docusign. The Motley Fool has a disclosure policy .
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