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DocuSign, Inc. (NASDAQ:DOCU) leads to another quarterly report with high expectations for business transformation. The electronic signature company expects growth in FY25 with the addition of AI product portfolio. My investment thesis Cheap stocks are bullish, especially on this recent decline in FQ1'25 earnings.
Source: Finviz
Searching for the bottom of the cycle
DocuSign has started to benefit with strong billing growth in FQ4'24 and potential indications are that AI will contribute to expanding growth opportunities in the contract management business. Investors will look for solid signs of strong billings growth expected in FQ2 when the company reports after the market closes on Thursday.
When the company reported FY24 results 3 months ago, DocuSign reported an increase in year-end billings. Bills for the January quarter rose 13 percent, but The e-sign company guided for only minimal growth for the current April.
Source: DocuSign FQ4'24 presentation
The company attributed part of the faster billing growth to strong renewals, driven by some of the larger customers that were previously billed. DocuSign suggests that usage continues to increase despite general weakness in the primary housing market.
Billing guidance for FY25 is ~$3.0 billion, which is only a 3.5% increase from the $2.9 billion just reported for FY24. The guidance did not advocate any expected change or boost from AI.
If DocuSign can confirm the bottom in the business, the stock could start to build some momentum. Otherwise, the billing growth of only 3% is not very interesting.
The company provided the following numbers for FQ1'25:
|
Total income |
$704 |
To |
$708 |
|
Subscription revenue |
$686 |
To |
$690 |
|
Billings |
$685 |
To |
$695 |
|
Non-GAAP gross margin |
81.0% |
To |
82.0% |
As mentioned above, all eyes are on the billing numbers. Last FQ1, DocuSign generated billings of $675 million and anything around and below the midpoint is virtually flat growth and an indication that the business is not headed for a CEO change in 2022. Is.
AI is the next opportunity to create some momentum in the concept of contract management. Customers need better ways to monitor a wide array of contracts, and AI support is a great opportunity.
DocuSign recently acquired AI-powered contract management software provider Lexion for $165 million in cash. The company has a large cash balance and generates strong cash flow, so cash is a drop in the bucket. The key is whether Lexion as an AI innovation to rapidly evolve into Intelligent Agreement Management, or IAM.
Limited downside risk
The main reasons for the unattractive nature of the purchase offer were pricing at current levels and limited downside risk. DocuSign trades at around $55, which is just 17x FY25 EPS targets of $3.24.
The company generated nearly $1 billion in free cash flow last fiscal year, so selling a stock with an $11 billion market cap doesn't make sense. Not to mention, DocuSign ended last quarter with a cash balance of $1.2 billion and paid off all outstanding debt last quarter.
The AI opportunity for a company with a $3 billion revenue base and a current total TAM of $50 billion is very attractive. Especially considering DocuSign has driven cost reductions and forecast 27%+ operating margins for FY25, leading to ~$800 million in annual free cash generation.
The macro environment is not helping end-user demand for software. An opportunity remains to own DocuSign based on a strong cash flow business with the opportunity to gain additional market share and expand the contract management market with AI solutions.
Wall St. analysts are not happy about the stock, with 16 holding ratings and only 6 strong buy/buy ratings. A lack of bullish analysts can provide conflicting signals.
Source: Search Alpha
Corporations don't seem to be spending aggressively on AI software, so DocuSign is unlikely to grow large enough to meet its original billing goals. Recently though, the company has provided conservative guidance that suggests some upside in estimates. The real focus is whether FQ1'25 billings growth is at the bottom of the current long cycle. .
take away
The key investor benefit is that DocuSign will appear to have a solid catalyst with AI-powered software solutions. The market is not bullish on the upside, while downside risk appears limited with strong cash balances and cash flow generation.
DocuSign isn't likely to move anytime soon, but the stock has been put off moving into next year.