Docusign stock has been under tremendous selling pressure recently this former wall
street darling has seen growth starting to slow and there are signs that it's struggling with
execution this is a stock that both brian and i own but is the thesis for this stock busted?
here's our latest thoughts on docusign my name is Brian Feroldi and my name is brian stoffel
this video is sponsored by our friends at ycharts more on them later brian we've done a deep dive
into docusign before and both you and i think that there's a lot to like about this business
there really is brian if you look over the last four years revenue has more than quadrupled
gross profit has kept pace with that growth which is important because it means they're not just
giving their product away for less and when you look at free cash flow it is absolutely exploded
up over a thousand percent in the past four years and when i look at the company's fourth quarter
results i still think there's a lot to like i see revenue growth up 35% billings growth up
25% i see a higher gross margin i see a higher non-gaap net income i see higher free cash flow
and i see a war chest of cash what's not to like here's the thing brian if docusign was a story
and the book ended today it would be a great story but the stock market is forward-looking and when
i look forward i'm starting to see some things that worry me now to really get into this let's
look at the score that i gave this company back when we ran it through the anti-fragile framework
and eight and a half is a decent score it's not great but there was enough that i found
out during that process that i was willing to invest in it but there's one part of it that i'm
starting to wonder about and that's optionality i gave it two and a half points out of three
which is really high and all of that is predicated on the agreement cloud yeah just to review so many
people think of docusign as just an e-signature company but the thing that attracted both of us
to this was really their agreement cloud this is a tool that handles every facet of an agreement
including creating the agreement negotiating agreement creating the forms signing the agreement
notarizing agreement accepting payments getting insights monitoring the agreement both of us
believe that that provided the company with far more opportunity than just e-signatures alone yeah
e-signature alone is a $25 billion market neither you or i has any doubt that docusign's doing a
great job here it's that other $25 billion market everything that you just mentioned that really had
us interested so i gotta ask what has changed your mind well we'll get to the agreement cloud in a
second but first if we just look at the numbers we see some things that raise at least yellow flags
now revenue growth is slowing but that's to be expected because covid provided a one-time push
but it's slowing much faster than some might think if we look at the end of the current quarter
growth is going to slow to about 30% over the trailing four quarters and by the end of the year
it's going to be all the way down to 18% that's a rather rapid slowdown and it makes me wonder
where's the agreement cloud isn't it adding anything to this if we look at billings we see
the same trend again this isn't totally surprising but the slowdown seems rather dramatic by the end
of this fiscal year management expects just %15 percent growth in billings that's a big slowdown
so if management truly believes that this is a $25 billion opportunity why is growth slowing so much
and for that i went to the conference calls now in september of 2021 roughly three quarters ago dan
springer the company's ceo said that he believes that the company is back to where it was two years
ago which makes sense in 2019 docusign was ready to roll out the agreement cloud then covet hit
and everyone wanted e-signatures and they put all of their attention there he's saying that as of
september we're ready to refocus we're back where we were two years from now which to me means we're
gonna start to see some important pickup in the agreement cloud moving forward but fast forward
to two quarters ago of december of 2021 and we're starting to see well is that really happening
springer is now saying we're adjusting our sales force we're going to have them re-emphasize and
focus on the agreement cloud i thought that was what he said they were doing a quarter ago but now
at least they're really moving in that direction and putting their resources behind but by the most
recent quarter and this is just a few weeks ago springer is again talking about the agreement
cloud when one of the analysts asks him about contract lifecycle management which is one of the
products in the agreement cloud he says we really need to field focus our efforts which to me means
we've got the sales force out there we thought we were where we were two years ago but it's not
really getting a whole lot of traction could that be a sales problem sure it could be but could it
be that it's just not as attractive to customers as i thought it would be that's definitely a
possibility as well what all of this made me do was go back and look at my original analysis of
docusign and take that two and a half score that i gave the company for optionality and slash
it when i lower it down to a one and a half that lowers our overall score from an eight and a half
to a seven and a half again this is still very much in the investable range but i don't tend
to like to invest in companies that are in that area fair enough ryan and i agree with everything
you just said and in response to that i also re-ran docusign through my investing checklist
previously this company scored in the 80s which is in my high quality business category but i
recently bounced it down to a 75 in response to this quarter because organic growth is slowing
and i'm not giving the company as much credit for optionality so like you this company has fallen
on my quality score now there's one more factor we need to discuss that truly made the decision
for you to sell docusign today before we get to that we want to give a shout out to this video's
sponsor which is why charts so if you've been following our channel for any period of time
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them on twitter at ycharts thanks why charts for sponsoring the video alright brian everything we
just said the market agrees in and that does seem to be priced in if you look at the company's price
to sales ratio that's fallen to a multi-year low and it's currently under seven if you look at the
price to free cash flow ratio that's basically at an all-time low and it's only about 33. so
these numbers are actually very compelling from a valuation perspective why on earth are you selling
well brian i think it's really important to point that out because my decision to sell might end up
being a bad one under normal market conditions i would just hold my shares of docusign and
let this play out to see how the thesis evolves however we don't have normal market conditions
many of the stocks that you and i both hold are down enormously from their all-time highs and i
simply think that there are stronger companies out there trading at better deals right now so
i'd rather take what i have left in docusign and redistribute it to those stronger companies that
have more optionality so in other words you don't think that the docusign thesis is busted but there
are some yellow flags that are causing you to say i'd rather have my capital in something else
exactly and that something else is also trading much lower than it was four months ago well if
you're interested in hearing about what stocks brian is going to be plowing us docusign capital
into let us know in the comments section below as for me as a current docusign shareholder i'm
not foaming at the mouth to add to my position today but i still think that the thesis for this
company could be on track long term and i'm going to give the company some time to to figure it out
that could also prove to be a mistake but i still think there's a lot to like about this business
so i'm personally not going to be selling we hope you enjoyed this video brian's out