DocuSign: Not Convinced That A Growth Inflection Is Anywhere Near

Overview

My recommendation for DocuSign (NASDAQ:DOCU) is a neutral rating, as I still do not have any confidence that growth could accelerate in FY25, despite the positive headline revenue and billings growth. My assessment shows that revenue growth still tracks poorly vs. history, and like-for-like billings growth remains weak at single-digit percentage growth. While there are signs of stabilization, the fact is that DOCU is expected to grow in the mid-single digits, much lower than peers’ growth rates. Note that I previously rated a hold rating for DOCU as operating metrics were weak, and I was worried that near-term performance would remain soft given the poor macro conditions.

Recent results and updates

While I am encouraged by the more positive tone around execution and customer usage trends, coupled with macro commentary suggesting a stable to slightly better environment in 4Q24, I am still not entirely convinced that the DOCU business is poised to see a positive inflection in FY25. I think the prevailing near-term bull thesis stemmed from two key metrics in the recent 4Q24 result: revenue and billings growth, where DOCU reported total revenue of $712 million, representing an 8% growth that beat consensus growth expectations by 200 bps, and pro forma billings of $833 million, representing 13% growth and 800 bps y/y growth acceleration vs. 3Q24.

Just looking at face value, it seems to suggest that DOCU growth has seen a strong positive inflection. However, my assessment differs from this. On revenue, while it beat expectations, I note that the 8% y/y growth saw a deceleration compared to the past few quarters. To better assess the “inflection point,” I look at DOCU’s revenue sequential growth rate, which is just 1.7% in 4Q24, still far below the normalized 10% sequential growth rate that DOCU typically sees in 4Q (worse still, 4Q24 sequential growth is actually lower than 4FQ23 sequential growth of 2.2%). As for the billings growth, I don’t think that 800bps of y/y growth acceleration should be extrapolated into FY25 given that 400bps was due to: (1) renewals with large customers; (2) deferred billings from 3Q24; and (3) pulled forward demand from FY25. If I were to simply assume each of them contributed equally to the 800 bps improvement, the actual improvement would be around ~260 bps given that (2) and (3) are unlikely to happen again. Like-for-like billing growth would just be ~800 bps (remaining at single-digit growth).

As such, I remain conservative in assuming growth inflection in FY25. However, I think there is a case to be made for DOCU’s medium-term growth, as some key metrics show further signs of stabilization. Management reported that overall macro sentiment slightly improved in 4Q24, despite acknowledging that software optimization and macro-related customer purchasing caution continue to impact overall net new expansion. Other signs of demand stabilization could be seen from DOCU increased signage and renewal of multi-year, multi-million-dollar contracts, and this traction seems to have followed through into 1Q25 at least (since they guided for this in early March), given that management expects the net retention rate to be flat to down slightly in 1Q25 (from the 4Q24 decline of 200bps sequential decline). Similarly, consistent with the previous quarter, total customers increased by 11% to 1.51 million, and sequential net customer additions returned to the recent average of 40,000. After two periods of contraction in Q1 and Q2, customers with >$300K in annual contract value [ACV] witnessed a sequential improvement of 9 to 1,060 in the second quarter of net additions, indicating a recovering demand profile.

Valuation and risk

According to my model, DOCU is valued at $58.41 based on the current outlook. This target price is based on my growth expectation of 6% in FY25, the midpoint of guidance. As I note above, I don’t feel confident that DOCU would see a strong growth acceleration in FY25 (reflecting the 13% billing growth) because of the deferred and pulled forward billing recognition. I mean, management is literally guiding for 6% growth, which is telling of the growth momentum so far in 1Q25. This growth expectation screens really poorly when compared to Adobe (ADBE), which guided for ~11% growth at the midpoint. Pre-covid, DOCU typically traded at ~0.8x to 1x ADBE forward revenue multiple, but that has sunk to just 0.4x today, which I believe is a reflection of the significant growth slowdown. In my base case, I assumed DOCU to continue trading at this relative multiple of 3.8x forward revenue (0.4x ADBE multiple) given the slower growth. In the bear case, if DOCU’s growth were to continue slowing (which could be because of continuous soft macro conditions) while ADBE continues to accelerate growth (consensus expects growth to accelerate from FY24’ 10.6% to 11.5% in FY25), the relative multiple could dip back to the all-time low of 0.2x. In the bear case, DOCU could be worth only $31. As such, I don’t see the current share price as attractive.

Summary

Summarizing this post, I maintain a neutral rating for DOCU. While there are signs of stabilization, growth is still expected to be mid-single digits in FY25, lagging behind ADBE. Recent growth acceleration appears inflated due to one-time factors and pulled-forward demand. While the stock trades at a discount to Adobe, it reflects DOCU’s slower growth trajectory. That said, DOCU might be a good fit for investors seeking a turnaround story if growth reaccelerates, but for now, the neutral rating reflects the lack of a clear inflection point.