DocuSign (DOCU) stock price has underperformed the market in the past few years. It was trading at $60 on Tuesday, where it has been stuck for a while. Since August 2022, it has remained inside $40 and $70 while top American indices like the Nasdaq 100 and S&P 500 have jumped to a record high.
Smartsheet acquired
A potential catalyst for DocuSign emerged this week when Blackstone and Vista Equity Partners teamed up to acquire Smartsheet in a $8.4 billion deal.
This is a notable deal because Smartsheet is a single-product company that used by thousands of customers globally.
It is a sign that private equity companies, with trillions of dollars in dry powder, are about to start buying cheap companies at a time when their growth are slowing.
Smartsheet, started 19 years ago, had strong growth during the pandemic. Its annual revenue has risen from over $270 million in 2019 to over $1 billion in the trailing twelve months (TTM).
However, there are signs that its growth is starting to slow, with analysts expecting the figure to rise to $1.12 billion in 2024 and $1.29 billion in 2025.
This growth is slowing as companies become more concerns about costs. Many firms have also started to move to large companies like Salesforce and Microsoft that offer numerous solutions.
Analysts expect that M&A deals will accelerate for two main reasons: interest rates are now falling while the US could have a President Trump, who has vowed to deregulate the economy.
DocuSign could benefit
DocuSign is another company that could benefit from the Smartsheet acquisition because the two companies are almost similar.
They are both single-product companies whose growth has slowed after surging during the Covid-19 pandemic.
For starters, DocuSign is a company that offers an eSignature solution to companies and individuals worldwide. Its product includes tools like website forms, electronic notarisation, document generation, and identity management.
DocuSign is used by thousands of companies like United Airlines, Santander, Unilever, Ducati, and Flowserve.
Its annual revenue soared from over $974 million in 2019 to over $2.7 billion in the last financial year.
Like Smartsheet, its business is growing at a slower rate than before. Analysts expect that its revenue will come in at $745 million in the third quarter from $700 million in the same period in 2023.
Analysts also expect that its annual revenue will jump to over $2.95 billion and $3.12 billion in 2025, representing 6.70% and 5.90% growth, respectively. In the past, the company was used to have high double-digit growth rates.
The most recent results revealed that its total revenue grew by just 7% in the second quarter to $736 million. It expects that its revenue will be between $743 million and $747 million in the current quarter.
And like Smartsheet, DocuSign’s insiders don’t have a big stake in the company, which can complicate the buyout process. Insiders own just 1% of the total shares, according to Yahoo Finance. In contrast, acquiring a company like Asana would be difficult because insiders, especially Distin Moskovitz own 42% of the float.
Competition is a big issue
One reason why DocuSign’s growth has slowed is that, like Smartsheet, the industry has become highly competitive.
DocuSign is now competing with many eSignature brands. For example, Google has started offering eSignature solutions on Google Docs and its other solutions. This means that people and organisations using Docs and Sheets can easily sign documents without using an external provider.
Other companies like Adobe, HelloSign, SignNow, and RightSignature have also launched their solutions. HelloSign was acquired by Dropbox in 2019.
Therefore, a private equity company can buy Dropbox, hoping to improve its operations as a private company.
Besides, there are signs that Dropbox is highly undervalued. One way for valuing a SaaS company like DocuSign is to use the so-called rule-of-40, which is calculated by adding a company’s growth and margins. In Dropbox’s case, it has a net income margin of 34% and a growth rate of 7%, giving it a figure of 40.
Most importantly, there have been rumours of the company’s acquisition for a long time. In December, WSJ reported that the firm was exploring a sale.
DocuSign stock price analysis
DOCU chart by TradingView
The weekly chart shows that the DOCU share price has moved sideways in the past few years as its growth slows. It has remained inside the key support level at $39.85 and the resistance level at $70.
DocuSign stock has continued to oscillate at the 50-week and 25-week moving averages while the Average True Range (ATR) has dropped, signaling that it has little volatility.
Therefore, the stock will likely remain in this range for a while. In the long-term, however, it will likely bounce back as odds of an acquisition rise. If this happens, it will likely retest the key resistance point at $70.
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