DocuSign has been treading water for the past six months, recording a small return of 3.8% while holding steady at $55.85.
Is there a buying opportunity in DocuSign, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think DocuSign Will Underperform?
We don’t have much confidence in DocuSign. Here are three reasons you should be careful with DOCU, plus one stock we’d rather own.
1. Weak ARR Points to Soft Demand
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
DocuSign’s ARR came in at $3.30 billion in Q1, and over the last four quarters, its year-on-year growth averaged 8.5%. This performance was underwhelming and suggests that increasing competition is causing challenges in securing longer-term commitments. 
2. Long Payback Periods Delay Returns
The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.
DocuSign’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a highly competitive environment where there is little differentiation between DocuSign’s products and its peers.
3. Operating Margin Rising, Profits Up
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses — everything from the cost of goods sold to sales and R&D.
Looking at the trend in its profitability, DocuSign’s operating margin rose by 2.8 percentage points over the last two years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 10.6%.
Final Judgment
We cheer for all companies solving complex business issues, but in the case of DocuSign, we’ll be cheering from the sidelines. That said, the stock currently trades at 2.9× forward price-to-sales (or $55.85 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.
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