Valued at a market cap of $16.8 billion, DocuSign (DOCU) is an e-signature company that gained massive traction during the COVID-19 pandemic, driving the stock toward record highs in August 2021. However, due to a challenging macro environment and slowing revenue growth, the tech stock now trades 73% below all-time highs.
This means DOCU stock has returned less than 20% since its initial public offering (IPO) five years ago. However, the tech stock has almost doubled over the past 52 weeks, thanks to improving profit margins and steady top-line growth.
Let’s see if DocuSign can beat Wall Street's earnings estimates in its upcoming Q3 report, and continue to outperform over the next 12 months.
What Does Wall Street Expect from DocuSign in Fiscal Q3?
DocuSign is scheduled to announce its fiscal Q3 of 2025 (ended in October) results after the close on Thursday, Dec. 5. According to consensus earnings estimates, DocuSign is forecast to report revenue of $745.33 million, up from $700.4 million last year, and adjusted earnings of $0.87 per share, up from $0.79 per share last year. This suggests that DocuSign’s revenue will increase 6.4%, while adjusted earnings are forecast to expand by 10.6% year over year.
In its Q2 earnings call, DocuSign forecast Q3 revenue between $743 million and $747 million with an adjusted operating margin between 28.5% and 29.5%. Management forecast subscription sales at $724 million with gross margins between 81% and 82%. DocuSign also raised its full-year guidance for fiscal 2025 to a range between $2.94 billion and $2.95 billion, higher than previous estimates of $2.92 billion to $2.93 billion.
Investors will be closely watching to see if DocuSign can reaccelerate its revenue growth on the back of its Intelligence Agreement Management (IAM) platform. DocuSign recently launched the IAM, which aims to enhance agreement workflows and increase customer retention rates. Moreover, it has leveraged artificial intelligence (AI) capabilities to offer products such as contract lifecycle management, making it the go-to platform for businesses who want to streamline and digitize the agreement process.
In fiscal Q2, DocuSign surpassed its revenue and gross margin estimates. However, sales grew by a single-digit percentage year over year, which might indicate a saturated market. The company may have to consider expanding product offerings and introducing other innovative solutions to drive top-line growth.
Is DocuSign Stock Undervalued?
In fiscal Q2, DocuSign reported revenue of $736 million, surpassing the upper end of management's guidance. Its operating margin stood at 32.2%, also beating estimates of 27.5%. Investors remain wary of its revenue growth rates, which stood at 7% in Q2. DOCU also ended the quarter with billings of $724.5 million, an increase of less than 2% year over year.
Notably, DocuSign has a large and established user base and is a significant player in the e-signature market. Like other companies, DocuSign has focused on improving its profit margins amid an uncertain macro environment. It reported net income of $4.26 per share in Q2, up from $0.04 in the year-ago period.
The company’s free cash flow rose 7.8% to $198 million. In the last 12 months, its free cash flow stood at $919 million, up from $887 million in fiscal 2024 and $429 million in fiscal 2023.
Priced at 18x trailing free cash flow, DOCU stock is reasonably valued. Analysts expect sales to rise from $2.76 billion in fiscal 2024 to $3.12 billion in 2026. Given a margin of 35%, DocuSign could report a free cash flow of $1.1 billion. Given its adjusted earnings estimates, the tech stock currently trades at 22.8x forward earnings.
Out of the 17 analysts covering DOCU stock, the consensus rating is stuck at a “hold.” The average target price for DocuSign stock is $64.78, about 25% lower than current prices.
