When you’re an unprofitable business, it’s sales growth that matters.
Investors are prepared to overlook red ink on the income statement provided sales are growing rapidly, and there is a promise of profit and cash flow down the line.
For a couple of years, this was how investors viewed the digital signature company a company growing sales at an impressive rate but generating a loss along the way.
The pandemic put a swift end to pen and ink signatures in the business world and e-signature penetration shot up.
This led to rapid sales growth for the company and an equally sharp run-up in its stock price.
The problem is that this was not new demand creation. We were moving towards digital signatures anyway, the pandemic just meant we got there a lot faster.
So demand got pulled forward and DocuSign’s stock price shot up. But as growth has slowed, its shares have round-tripped to pre-pandemic levels.
This leaves investors wondering what to do next.
The normal life cycle of a growth company is when sales growth slows, profit margins go up.
DocuSign is in a tricky spot then. Its sales growth has slowed, but it is still loss-making and the market has concluded that the company is less valuable than before the pandemic.
But this might be a little harsh. As a subscription business, DocuSign has increased its installed base substantially over the last two years, and it is unlikely that its customers will return to pen and ink signatures in the future. This means the company is benefitting from a recurring revenue base that is much larger than anyone would have expected a few years ago.
DocuSign has work to do to prove its business model will provide investors with future profits, especially given its sales growth guidance for this year looks pedestrian in comparison with the last two years.
On the other hand, it's probably wrong to just dismiss the last two years as if they hadn’t happened.
When it comes to valuing stocks, it's about the future, but it's the past that builds foundations for the future. No one would argue that the last two years have been anything other than successful for DocuSign.
This should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice.
When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.
Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).
Freetrade does not provide investment advice and individual investors should make their own decisions or seek independent advice. The value of investments can go up as well as down and you may receive back less than your original investment. Freetrade is a trading name of Freetrade Limited, which is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales (no. 09797821).Copyright © 2022 Freetrade, All rights reserved. The Apple logo is a trademark of Apple Inc. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.
Made with 🍩 in London, Stockholm, Brisbane and Vancouver.