DocuSign (NASDAQ: DOCU) holds tremendous potential as a comeback stock. It boomed during the height of the pandemic when entities needed its online solution to execute agreements. Although that need abated after the end of lockdowns, the company proved that e-signatures are here to stay.
According to Fortune Business Insights, the online-signature market will enjoy a compound annual growth rate (CAGR) of 35% through 2030, and the document management industry has an expected CAGR of 17% over the same period. That points to the tremendous potential of DocuSign and its industry.
The company hopes to take advantage of this growth more fully through a document ecosystem called the DocuSign Agreement Cloud. Unfortunately for shareholders, one considerable uncertainty casts a dark cloud over the company's future. The question for investors is which "cloud" should become the deciding factor regarding DocuSign stock.
Cloud No. 1: The DocuSign Agreement Cloud
DocuSign stock lost most of its value after its pandemic-driven boom ended. The end of lockdowns meant entities could again execute agreements on paper. Also, companies such as Adobe and Dropbox began to compete. All these factors dampened enthusiasm for the stock.
Still, one offering that could bolster its competitive advantage is the DocuSign Agreement Cloud. Instead of simply putting together contracts and gathering signatures, the Agreement Cloud creates a document ecosystem around what it calls "document life cycle management."
After parties execute a contract, the Agreement Cloud will store the document, and when parties need to pull up an agreement, it is easily accessible. This helps organizations with compliance issues and can help keep an agreement up to date when the time for renewal comes.
Moreover, documents play a crucial role in our lives. Knowing that, users might feel more comfortable working with a "document company" instead of a software or cloud company that happened to enter the document market. And this could possibly enhance DocuSign's competitive advantage.
These factors might also help its stock, which has gained little traction since the end of lockdowns led to slowing growth. Still, with the stock at a forward price-to-earnings (P/E) ratio of 18, investors might see it as a bargain if the Agreement Cloud can reinvigorate growth.
Cloud No. 2: The cloud over DocuSign's future
Unfortunately, the stock suffers because of a different cloud, the one hovering over its future. The falling stock price has dramatically increased buyout interest from private equity companies, specifically Bain Capital and Hellmann & Friedman.
Still, talks appear to have stalled, casting considerable doubt over the direction of DocuSign's future. That uncertainty extends to investors. If a deal goes through, investors will likely experience a one-time bump in the stock price before trading ceases. However, if a deal does not materialize, the price of the software-as-a-service (SaaS) stock will likely fall as the traders hoping to profit from a buyout exit the stock.
The specter of a buyout also hinders long-term investors. Those fortunate enough to buy in late 2023 at less than $40 per share will at least earn a profit; those who bought in late 2021 in the high $200s per share lose all hope of recovering their investment.
And all long-term shareholders lose out on a stock that could potentially recover if it remains on the public market. Hence, until DocuSign's future becomes more certain, the situation leaves investors wondering whether the stock is a long-term investment or merely a trade.
Which cloud should investors heed?
Unfortunately for investors, the cloud regarding its future likely holds more near-term influence over its stock. DocuSign's current situation makes the stock a bet on a possible buyout, making it difficult to argue that the company is an investment.
However, if buyout interest abates, and it moves forward as a stand-alone company, investors should start to pay attention. DocuSign leads the market in online signatures and document management, and the Agreement Cloud could help it stave off competitors. Such conditions could make it a market-beating stock over time.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Adobe and DocuSign. The Motley Fool has a disclosure policy.
