Software-as-a-Services (SaaS) stock DocuSign, Inc. (DOCU) surpassed revenue estimates by $18.08 million for its latest reported quarter. However, it has lost 57.5% over the past year and 15.7% over the past six months to close the last trading session at $53.99.

Moreover, the tech and software industries has been suffering from mass layoffs amid economic uncertainties. Tech companies laid off more than 60,000 employees in 2022. DOCU also announced layoff plans in September 2022, which is expected to continue in 2023.

In addition, looming recession fears are adding to the woes. Investors’ pessimism in software stocks is evident from the SPDR S&P Software & Services ETF’s (XSW) 21.1% loss over the past nine months.

Here is what could shape DOCU’s performance in the near term:

Mixed Financials

DOCU’s total revenue came in at $645.46 million for the quarter that ended October 31, 2022, up 18.3% year-over-year. Its gross profit increased 20.1% year-over-year to $515.92 million. Also, its subscription revenue came in at $624.05 million, representing an increase of 18.1% year-over-year.

However, its net loss increased 426.2% year-over-year to $29.87 million, while its loss from operations came in at $27.43 million, up 716.9% year-over-year.

Stretched Valuations

DOCU’s forward EV/Sales of 4.75x is 76.7% higher than the industry average of 2.69x. Its forward EV/EBITDA of 21.23x is 60.1% higher than the industry average of 13.26x. In addition, its forward Price/Sales of 4.35x is 58.6% higher than the industry average of 2.74x, while its forward Price/Book of 18.61x is 396.8% higher than the industry average of 3.75x.

Negative Profitability Margins

DOCU’s trailing-12-month EBITDA and net income margins of negative 0.49% and 5.45% are lower than the industry averages of 11.58% and 3.22%, respectively.

In addition, DOCU’s trailing-12-month ROCE, ROTC, and ROTA of negative 37.50%, 4.04%, and 4.86% compare with the industry averages of 4.75%, 3.21%, and 1.52%, respectively.

POWR Ratings Reflect Bleak Outlook

DOCU’s overall rating of C equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

DOCU has a C grade for Sentiment. Its revenue is expected to increase 18.5% year-over-year to $2.50 billion in 2023. However, its EPS is expected to decline 3% year-over-year to $1.92 in 2023.

It has a D grade for Stability, in sync with its 24-month beta of 2.32.

In the 25-stock Software – SaaS industry, DOCU is ranked #6.

Click here for the additional POWR Ratings for DOCU (Growth, Value, Momentum, and Quality).

View all the top stocks in the Software – SaaS industry here.

Bottom Line

While DOCU’s revenues increased in the last reported quarter, its bottom line is in the red. Moreover, considering its negative profit margins and stretched valuations, I think it might be best to wait for a better entry point in DOCU.

How Does DocuSign, Inc. (DOCU) Stack Up Against its Peers?  

While DOCU has an overall POWR Rating of C, one might consider looking at its industry peers, Park City Group, Inc. (PCYG), Informatica Inc. (INFA), and The Descartes Systems Group Inc. (DSGX), which have an overall B (Buy) rating.

DOCU shares were trading at $55.75 per share on Friday afternoon, up $1.76 (+3.26%). Year-to-date, DOCU has gained 0.60%, versus a 2.51% rise in the benchmark S&P 500 index during the same period.

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.

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