DocuSign (DOCU), a leading e-signature software company just reported its latest quarterly earnings and the stock is down 40%. The company reported revenue of $545.5 million, up 42% year-over-year. However, billings only increased 28% year-over-year. This is concerning as billing growth dropped for 4th consecutive quarter in a row. The CEO explained that the work from home trend is normalizing which contributed to the slowdown in growth.
One of the other concerns is that the company’s TAM (total addressable market) is relatively small compared to other software companies. The company focuses mostly on only two areas which are electronic signature and contract management. The trend of shifting from physical to digital signature and contract is not slowing down, but their niche limited their room for expansion while facing competition from larger companies such as Adobe (ADBE).
After the drop, the stock is now trading at a P/S (price to sales) ratio of around 13 which is quite attractive for a profitable SaaS company growing at 40%. However, the revenue growth is also forecasted to slow down to around mid-twenty percent. The CEO said that the company is going to try to generate demand instead of fulfilling demand going forward, such as developing new use-cases for its products, but this may take some time to materialize. I am neutral on the stock for now. The valuation is compelling but I believe the company will need to prove that they are capable to accelerate growth even after the pandemic in order for investors to feel confident about the company’s prospect again.
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