Is it time to ditch DocuSign stock?

After declaring his income on June 9, DocuSignit is (DOCU 4.64%) the stock fell 25%. The sell-off helped send DocuSign shares down more than 80% from their all-time high.

This fall is quite dramatic, but is it deserved? After all, DocuSign has won many customers over the past two years. But with the immediate resignation of the CEO, a wrench has been thrown into the business. Although I cannot predict the future, I believe this past quarter has given some clear signals that investors and potential investors should be aware of.

Slow growth for a young company

DocuSign’s software is relatively self-explanatory: it allows parties to sign legally binding contracts without being there in person. Additionally, it offers a contract lifecycle management product that helps users process contracts quickly and efficiently, saving time and money. These tools were essential during the pandemic, as few deals were done in person.

Now that the business world has moved away from this environment, DocuSign’s products are in less demand. This fact was underscored by DocuSign’s projection of only 7-8% billing growth this year. For most investors, if a company is only growing at an 8% rate, it is better off buying back shares, paying a dividend, or valuing cheaply.

DocuSign does not fit any of these descriptions.

Image source: Getty Images.

For the first quarter of fiscal 2023 (ended April 30), DocuSign reported a GAAP net loss of $27 million on revenue of $589 million (which increased 25% year over year). on the other). However, it has positive free cash flow and boasts a solid 30% margin.

Free cash flow does not include stock-based compensation because it is not a cash expense. DocuSign’s stock-based compensation bill was $111 million for the quarter, but DocuSign had issues paying some employees with stock.

A low stock price means lower compensation

With the cratering of DocuSign stock, anyone receiving stock in compensation received a significant pay cut. Additionally, management pointed out in the earnings call that the market had become saturated and prospects were harder to find.

As a result, DocuSign has experienced staff turnover and now has to fill vacancies, which takes up a lot of time and money in today’s job market. Her stock isn’t as valuable as it once was, so she either has to issue more shares (which dilutes existing shareholders) or pay them in cash (which hurts free cash flow and to other operating parameters). Either way, it’s not a good situation if you’re DocuSign management or an investor.

However, the recent exit of an employee exceeds all other departures.

A quick exit

On June 21, CEO Dan Springer announced his intention to step down effective immediately. However, on the June 9 investor call, Springer said he was “tired” and the pandemic years were “difficult” because of all the “hard work” at DocuSign.

This language should have been a telltale sign to investors that something was on the horizon, but it is now too late for those conclusions. Board Chair Mary Wilderotter will take over as CEO of Springer, and she brings extensive experience from her tenure as CEO of Border communications.

While I have faith in Wilderotter, it seems a bit concerning that Springer quit abruptly. Whether it’s poor business prospects or the board forcing him out, either scenario doesn’t represent an ideal situation.

Slow growth and labor turnover can ruin a business. But is there anything to get excited about?

DocuSign continues to win customers

Prior to announcing its results, DocuSign and Microsoft announced a deeper relationship that will include deeper integration of DocuSign’s products into the Microsoft Office suite. This deal is huge for DocuSign because it puts the company’s offerings in front of nearly every business and every consumer.

Going back to its quarterly results, DocuSign added 70,000 customers, bringing its total to 1.24 million. Additionally, its international segment grew 43% year-over-year, accounting for 25% of total revenue. This expansion may provide DocuSign with growth opportunities, although it may have to work a little harder as it is outside of US borders.

Despite some glimmers of hope amidst a lot of bad news, I still hold on to my DocuSign stock. However, I probably won’t increase my position until I see how the next quarter unfolds. There is a lot of uncertainty about the company, stocks, leadership, and the market as a whole, and there are too many other companies trading at bargain prices to consider adding to DocuSign.