If you’ve made any significant transactions lately, including but not limited to purchasing a home, you may have come across DocuSign Inc. (NASDAQ: DOCU).
DocuSign shares fell 2.84% on Feb. 6 on heavy volume on news that acquisition talks had stalled. DocuSign issued a press release saying it would undertake a restructuring “to support multi-year growth” as an independent public company.
The DocuSign chart offers an easy glimpse of the stock’s trajectory since it went public in 2018. It peaked in August 2021, but fewer investors have signed up to buy shares since then.
The stock has fallen 18.55% over the past year and 40.32% over the past three years. This is enough to engage activist investors in driving change or to attract outside investors who see hope in transforming a company.
Indeed, this is what is happening to DocuSign. In January, two private equity firms, Hellman & Friedman and Bain Capital, were both competing to acquire the electronic signature specialist.
Offered $8 billion in acquisition financing
JPMorgan Chase & Co. (NYSE: JPM) and Bank of America (NYSE: BAC) said they will provide up to $8 billion in financing to acquire DocuSign.
Those plans reportedly fell through, as private equity firms failed to reach an agreement with DocuSign on the company’s valuation. The current market capitalization is $10.55 billion.
DocuSign has been among the big flyers of the pandemic era, joining stocks including Clorox Co. (NYSE: CLX), Peloton Interactive Inc. (NASDAQ: PTON), Pfizer Inc. (NYSE: PFE), Moderna Inc. ( NASDAQ: MRNA), Zoom Video Communications Inc. (NASDAQ: ZM) and Etsy Inc. (NASDAQ: ETSY).
For various reasons, all those companies had products or services that were in high demand in a very strange historical period. However, as the Covid pandemic recedes further into the rearview mirror, all of these stocks are trading below their 2020 or 2021 highs.
In some cases, well below, as we’re seeing with DocuSign.
Revenue growth slowing over the past two years
If you take a look at DocuSign’s earnings, it might not immediately seem like the company is in trouble.
But dig a little deeper, and the problems become apparent: Revenue has been growing, albeit at a gradually slower pace. Over the past seven quarters, revenue growth has slowed from 35% to 7%.
DocuSign’s recent rallies have been based largely on sales rumors, rather than optimism about renewed growth.
In December, DocuSign shares jumped 38% as news broke that the company may be exploring a sale. It added another 2.47% to January’s rally, but when it became clear that a selloff wasn’t imminent, the stock collapsed, plunging 16% in the past week.
The problem isn’t that the DocuSign product isn’t useful; in fact, its use has become more widespread over time, as indicated by revenue growth.
Fewer growth catalysts
However, slowing revenue growth also tells a story: Demand has cooled, due to more in-person transactions and because many of the big users are already on board. Furthermore, rising inflation and fears of recession have weakened growth.
DocuSign has partnered with other companies, such as Microsoft Corp. (NASDAQ: MSFT), Meta Platforms Inc. (NASDAQ: META), Salesforce Inc. (NYSE: CRM), Alphabet Inc. (NASDAQ: GOOGL), and Oracle Corp. (NYSE :ORCL) to expand your user base.
However, these partnerships are instructive and could offer a clue to DocuSign’s future. All of these companies have grown by acquiring other technologies and adding them to their stack. This type of acquisition is common among technology stocks.
In contrast, DocuSign has one area of specialization, which could limit its growth potential.
In January, Morningstar analysts wrote: “A sale underscores our belief that electronic signature is a feature that is best contained within a broader platform. DocuSign’s contract lifecycle management may be that platform, but the solution remains a small portion of overall revenue, and investors may not have the patience to wait for a larger platform to reinvigorate growth, so there’s a rationale to sell the company. It is unclear whether there are other bidders.”