After Crushing Results, Is It Time to Buy This Bargain-Bin Tech Stock?

DocuSign (NASDAQ: DOCU) shares continue to tread water despite the electronic signature-solutions provider recently reporting better-than-expected second-quarter results. The stock is down about 5% year to date.

Let's dive into the company's most recent quarterly results to see if this is a buying opportunity.

Solid revenue growth, but bookings guidance disappoints

For it fiscal second quarter, DocuSign's revenue jumped 7% year over year to $736 million. Subscription revenue also increased by 7% to $717.4 million, while professional-service revenue edged up 2% to $18.7 million. Management previously issued guidance for total Q2 revenue of between $725 million and $729 million, and service revenue of between $705 million to $709 million, so it easily topped that forecast.

International markets once again led the way, with revenue climbing 15% and representing 28% of total revenue.

Billings came in at $724.5 million, up 2% from a year ago and within its guidance range of $715 million to $725 million. The company said the billings number was impacted by the timing of some contracts.

It ended the quarter with 1.6 million customers, up 11% versus a year ago. The number of customers with annualized-contracted value of $300,000 rose from 1,059 in Q1 to 1,066 in Q2. Dollar-net retention in the quarter was 99%, the same as in Q1.

Gross margin remained strong, coming in at 78.9% versus 78.8% a year ago. Meanwhile, the company lowered a number of operating expenses, including sales and market and general and administration. As such, adjusted earnings per share (EPS) soared 35% to $0.97.

DocuSign produced $220.2 million of operating cash flow in the quarter, with free cash flow of $197.9 million. It ended the quarter with cash and investments of $1 billion and no debt after buying back $200 million in shares in the quarter.

Looking ahead, the company slightly boosted its full-year revenue and billings guidance. It now expects revenue to be in the range of $2.94 billion to $2.95 billion, with subscription revenue of $2.86 billion to $2.88 billion. Billings are expected to land between $2.99 billion and $3.03 billion.

Source: DocuSign Q2 Earnings Release

For Q3, the company is looking for revenue between $743 million and $747 million, representing growth of about 6%. Billings are forecast to be between $710 million and $720 million, which would be about 3% growth at the midpoint of guidance.

Image source: Getty Images.

Time to buy the stock?

Trading at a forward price-to-earnings (P/E) ratio of just over 15 times based on next year's analyst estimates and just over 3.5 times price-to-sales (P/S) , DocuSign trades at bargain-bin prices given its high-margin, largely recurring subscription market.

DOCU PE Ratio (Forward 1y) data by YCharts.

The most attractive thing about the company is its prodigious free cash flow, which is on pace to top $850 million this year. For a company with an enterprise value of about $12 billion, it is throwing off a lot of cash.

Now ultimately, investors would like to see revenue growth pick up, and they have not been overly enthusiastic about DocuSign's billings growth recently, which can be a future indicator of revenue growth. However, the company just introduced its new Intelligent Agreement Management (IAM) platform, which it called the most important launch in its recent history. After launching the solution in Q2 to small and midsized customers, it said win rates and average deal sizes have been bigger and the time to close deals faster.

If IAM can reinvigorate growth next year and beyond, DocuSign will be an attractive investment, given its valuation and robust cash flow. With its low valuation and strong free cash flow , investors should feel comfortable buying the stock at current levels. That should help limit the downside in its share price as they wait to see if IAM can boost growth.

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Geoffrey Seiler has positions in Docusign. The Motley Fool has positions in and recommends Docusign. The Motley Fool has a disclosure policy .