DocuSign Has Already Been Pummeled But Fundamentals Show Stock Still Isn't Cheap

This article was written exclusively for Investing.com

So-called “pandemic winners” have been hammered over the past year, even relative to plunging broad market indices. DocuSign (NASDAQ:DOCU) has been no exception.

In September, the electronic signature software provider traded at over $300. It closed Friday just above $60. Among more than 700 large-cap stocks (market cap over $10 billion), only eight have fallen further from their 52-week high.

At the very least, that kind of decline makes shares of the e-signature solutions provider intriguing. Even accounting for the danger of “anchoring bias”—which we've discussed in the context of other fallen angels like Coinbase (NASDAQ:COIN)—an 81% fall suggests that at least the stock might be cheap. So too does the erasure, incredibly, of nearly $50 billion worth of equity value in less than ten months.

But intriguing isn't the same as compelling. Looking at DOCU with fresh eyes, the case for a long position isn't all that attractive—at least not yet. There are very real concerns and very real challenges here. The size of the sell-off to this point isn't relevant to those risks—and it certainly doesn't offset them.

DOCU Stock Isn't Cheap/h2

One big problem with buying the dip (or the plunge, as it were) is that even down 81% DocuSign still isn't cheap from a fundamental perspective.

At first glance, admittedly the San Francisco, US-based software provider looks like it's offering value. For fiscal 2023 (ending January), DocuSign is admitted , more than once, that the company took its eye off the proverbial ball. The company faltered at executing on its “land and expand” strategy, in which it attracts clients and then consistently sells more and more services.

There's plenty of room for improvement on that front as DocuSign adapts to a new normal. And like a lot of tech firms, that new normal may well include lower compensation (stock-based and otherwise) which in turn helps margins.

DocuSign certainly can't be written off yet. But that's not enough to make the stock a buy. There are going to be difficult quarters ahead. We don't really know how DocuSign will perform in a recession—the company only went public in 2018—but trends like a slowing housing market presumably will provide a headwind if the macro environment deteriorates. And, at the very least, it's nerve-wracking to own a stock ahead of earnings (the next report arrives in September) when that stock has averaged a decline of over 25% following its last three releases.

Put simply, the company has a lot of work left to do, and some stumbling blocks to avoid. At the right valuation, perhaps it's worth taking on that risk. The catch is that even down 81%, DOCU stock still hasn't hit the right valuation just yet.

Disclaimer: As of this writing, Vince Martin has no positions in any securities mentioned.

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Written By: Vincent Martin