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DocuSign Needs to Show Me Why I Should Buy This Stock

I want to see who takes the job of chief executive before committing capital.
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Apparently, reports of the post-Covid demise of e-signatures and specific platforms designed to facilitate business agreements digitally were greatly exaggerated. I think.

Former Sarge pandemic fave DocuSign (DOCU) posted the firm's second fiscal quarter financial results on Thursday evening. Those results were solid. Let's check this out.

For the three month period ended July 31st, DocuSign posted adjusted EPS of 0.44 (GAAP EPS: $-0.22) on revenue of $622.18M. Both top and bottom line performance exceeded Wall Street's expectations, while the revenue print was good enough for annual growth of 21.6%. The stock traded higher overnight. Adjustments were made primarily for stock based compensation.

Subscription-based revenue, which is the lion's share of what DocuSign sells, was up 23% to $605.2M. Professional Services driven revenue totaled just $17M, down 11%. Billings were up 9% to $647.7M. GAAP gross margin landed at 78%, adjusted gross margin moves up to 82%. However, not everything came up roses. Certainly not as net cash provided by operating activities dropped 32% to $120.9M, while free cash flow decreased 34.8% to $105.5M.

Outlook

- For the current quarter: DocuSign sees revenue of $624M to $628M. Wall Street is at $625M on this number. The firm sees subscription-based revenue at $609M to $613M, Billings at $584M to $594M, adjusted gross margin at 79% to 81% and adjusted operating margin at 16% to 18%.

- For the full fiscal year: The firm sees revenue of $2.47B to $2.482B. Wall Street is at $2.47B on this number. DocuSign sees subscription-based revenue at $2.405B to $2.417B, billings at $2.55B to $2.57B , adjusted gross margin at 79% to 81% and adjusted operating margin at 16% to 18%.

Balance Sheet

DocuSign ended the quarter with a net cash position of $976.7M, and current assets totaling $1.423B. Current liabilities amounted to $1.402B, allowing for a current ratio of 1.02. That passes muster, but not by much. Good thing this is not a business where we have to factor in inventory valuations.

Total assets add up to $2.667B, including $434.6M in goodwill and other intangibles. At 16% of total assets, that's not awful. Total liabilities less equity comes to $2.26B, including $720.7M in net convertible senior notes. The firm has enough cash on hand to pay this debt off. I think the balance sheet could improve, but I am a demanding sort. This balance sheet is not a problem.

Wall Street

I have only found five sell-side analysts that are both rated at four stars or better and have opined on DOCU since these earnings were released. We have one "buy" rating, three "hold" or hold-equivalent ratings and one "underperform" rating, which we consider a sell-equivalent. The average target price of the five is $66.60. The stock has been trading above that overnight. The low target price of our five is $55 (Dan Ives of Wedbush) and the high is $75 (Kirk Materne of Evercore ISI). Ives adds "We continue to be skeptical based on our checks that the momentum continues at DocuSign, and thus maintain our "underperform" rating."

Need To Know

In the wake of Dan Springer leaving the role of CEO in June. Board member Maggie Wilderotter continues to fill that position on an interim basis. A decision is expected to be made on filling the job permanently soon.

My Thoughts

The stock trades at 34 times forward looking earnings. The community of analysts is certainly not convinced that this company has put a halt to it's post-Covid slowdown. The balance sheet is okay, but not great. To be honest, it takes me aback just a bit when Dan Ives is this unenthusiastic about a name. We all know how Dan is when he is excited about a business. This is not that.

I certainly do not think I would buy this name on momentum this morning. A rough 9% of the float is held in short positions. A lot of this could be short covering. As far as going out on a short myself, I get really wary about shorting stocks once more than 8% of the float is already short. That's always been my cut-off.

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This stock traded as high as $314 one year ago, and as high as $157 this year. Just look at that Full Stochastics Oscillator. Says DOCU is oversold, but Relative Strength is well off of anything close to that. The upper trendline of this Pitchfork model should come under pressure from below this morning.

If the stock could take and hold both the 50 day line at $64 and this upper trendline, it would have a chance technically to make some hay. There is an unfilled gap between $70 and $87 that would then get some attention. That is, however, a long way from here.

The stock needs to show me. I am not convinced. I think I want to see who takes the job of chief executive before committing capital.

At the time of publication, Stephen Guilfoyle had no position in the securities mentioned.