DocuSign stock price has crashed by almost 30% from its highest level this year as concerns about its growth trajectory remained. It has retreated to $77.85, its lowest level since November 19. Is DOCU a good contrarian stock to buy ahead of its earnings on March 13?
DocuSign earnings ahead
The main catalyst for the DocuSign share price is its upcoming financial results, which will provide more details about its business trajectory.
The most recent third quarter numbers showed that the company’s business was still slowing. Total revenue rose by 8% in Q3 to $754 million.
DocuSign’s subscription revenue rose by 8% to $734 million, while its professional services rose by 11% to $20.1 million.
Wall Street analysts expect the upcoming results to show that DocuSign’s revenue will be $761 million. This outlook is near the upper side of its revenue guidance of between $758 million and $762 million.
The annual revenue is expected to be $2.96 billion, up by 7.25% from the previous year. It will then make $3.15 billion next year, a 6.36% annual increase, signaling that the growth trajectory has faded.
DocuSign’s growth has come under pressure for two main reasons. First, the e-signature industry has slowed in the past few years since the COVID-19 pandemic ended.
Second, the industry has become highly saturated, with many mainstream and smaller companies seeking market share. Big names like Adobe, Dropbox, Microsoft, Zoho, and Google are offering these solutions.
DocuSign has sought to differentiate itself by investing in artificial intelligence (AI). It launched the Intelligent Agreement Management (IAM), which empowers companies to connect and optimize all business processes that involve agreements.
Organizations of all sizes across all industries use IAM to help them improve the sales process, customer experience, and contract lifecycle. IAM starts at $420 a year, with the IAM Core going for $780 annually. While expensive, DocuSign hopes that companies can save up to $2 trillion.
Read more: Here’s why DocuSign stock could benefit from Smartsheet acquisition
DOCU has a cheap valuation
DocuSign is one of the biggest companies in the SaaS industry with a market cap of over $16 billion. This valuation is much lower than the peak of $64 billion in 2021 as demand for such SaaS companies fell.
Some analysts believe that DocuSign stock price is substantially undervalued. It has a forward P/E ratio of 16, much lower than the sector median of 27. The non-GAAP PE ratio is 22.5, lower than the sector median of 22.
This cheap valuation is mostly because analysts anticipate that the company’s growth will continue falling.
DocuSign is also cheap based on the Rule of 40 metric, which looks at a company’s growth and net income margin. Its net income margin is 34%, while its revenue growth is 10, meaning that it has a metric of 44. As such, the company is cheap, making it a good acquisition target in the future.
DocuSign stock price analysis
The weekly chart shows that the DOCU share price peaked at $105 in December last year. This was a notable level since it was along the 23.6% Fibonacci Retracement point.
It has now pulled back, and is nearing the key support level at $69.10, the highest swing in 2023 and 2024. Therefore, the DOCU stock price will likely drop and retest the support at $69.10, and then resume the uptrend. This performance is known as a break-and-retest pattern.
The bullish view is in line with what we wrote in the DocuSign share price forecast in December. At the time, we noted that the stock may surge to $175 this year.
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