DocuSign‘s (DOCU -22.85%) inventory declined 7% throughout after-hours buying and selling on March 9 after the corporate posted its newest earnings report. For the fourth quarter of fiscal 2023, which ended on Jan. 31, the e-signature service supplier’s income rose 14% yr over yr to $660 million and exceeded analysts’ expectations by $20 million. Its adjusted web revenue grew 33% to $133 million, or $0.65 per share, and likewise cleared the consensus forecast by $0.13.

For the total yr, DocuSign’s income rose 19% to $2.5 billion as its adjusted web revenue grew 2% to $419 million. These development charges appeared secure, however the bulls had been unimpressed and the inventory stays about 80% beneath its all-time excessive from September 2021. Let’s examine why this development inventory misplaced its luster — and if it is a good turnaround play for 2023 and past.

Picture supply: Getty Photos.

One other yr of decelerating development

DocuSign’s development in billings and income accelerated considerably in fiscal 2021 because the pandemic drove extra folks to work remotely and rely closely on digital contracts and signatures. Nonetheless, its development decelerated over the previous two years because the pandemic-induced tailwinds dissipated and contemporary macroeconomic headwinds battered the enterprise sector.

Information supply: DocuSign.

DocuSign nonetheless controls about 70% of the e-signature market with 1.36 million paying clients, however it faces stiff competitors from comparable companies like Adobe Signal, which is built-in into Acrobat; and Dropbox Signal (previously often called HelloSign), which is embedded into its cloud-based knowledge storage companies. That competitors doubtless exacerbated its latest slowdown.

DocuSign expects its deceleration to proceed with simply 0% to 1% billings development and eight% income development in fiscal 2024. Through the convention name, CEO Allan Thygesen — who took the helm final October — attributed that slowdown to a “difficult macro setting” characterised by “cautious” buyer sentiment and “moderated growth charges.”

However its margins are increasing

As DocuSign’s income development cools off, it is aggressively slicing prices to stabilize its margins. It already laid off 9% of its staff final yr, and it plans to put off one other 10% of its remaining staff this yr.

Its adjusted gross margin stayed flat yr over yr at 82% in 2022, which suggests it nonetheless has loads of pricing energy in opposition to its smaller rivals, whereas its adjusted working margin rose from 20% to 21%.

In fiscal 2024, it expects to put up an adjusted gross margin of 81% to 82% with an adjusted working margin of 21% to 23%. Analysts anticipate its adjusted earnings per share to rise 12% for the total yr.

DocuSign additionally turned worthwhile on a usually accepted accounting ideas (GAAP) foundation within the fourth quarter — due to its narrower working loss and better curiosity revenue — however analysts anticipate it to stay unprofitable (albeit with a narrower loss) in fiscal 2024.

A murky near-term outlook

DocuSign’s development will not speed up until the macro state of affairs improves, and it is unclear if Thygesen’s plans to develop its ecosystem with new synthetic intelligence options, digital contract options, and extra program integrations will transfer the needle. CFO Cynthia Gaylor, who has held that place for the previous 4 years, additionally plans to go away the corporate inside the subsequent few months.

That near-term outlook appears murky, and DocuSign’s inventory nonetheless is not low cost at 5 occasions this yr’s gross sales. Dropbox, which is rising at an identical charge, trades at 3 occasions this yr’s gross sales. Adobe, which is rising barely quicker than each firms, trades at 8 occasions this yr’s gross sales.

DocuSign is not doomed, however its inventory will not get better till its income development stabilizes. For now, buyers ought to keep away from this burnt-out development inventory and keep on with extra balanced tech firms till the macro state of affairs improves.