1 Glorious Growth Stock Down 78% to Buy on the Dip in December

Shares of Docusign (NASDAQ: DOCU) soared to a record high of $310 in September 2021, as pandemic-related lockdowns and social restrictions fueled explosive demand for its digital document software products, because they allowed businesses to continue making deals even without physical meetings.

But demand for Docusign's products slowed to a crawl when social conditions mostly returned to normal in 2022, as the company struggled to maintain its lightning-fast revenue growth from the previous two years. That triggered a sharp decline in its stock price, and it remains 78% below its 2021 peak as I write this.

However, Docusign's new Intelligent Agreement Management (IAM) platform is breathing new life into its business. It uses artificial intelligence (AI) to make contract management simpler than ever before, and despite being launched only a year ago, demand has been very robust. The stock is trading at an attractive valuation, so here's why now might be a great time to buy it for the long term.

Image source: Getty Images.

IAM is a game changer for businesses

IAM is designed to solve what Deloitte, a global consulting firm, calls the "agreement trap," which refers to the $2 trillion in economic value that businesses lose every year from having poor contract-management processes.

The platform has a number of tools, including Navigator, a digital repository where businesses can store all of their agreements. Using AI, it extracts valuable information from each contract and makes it discoverable via a search function, which saves employees enormous amounts of time because they no longer have to manually sift through individual documents to find what they are looking for.

Maestro is another popular IAM feature. It enables businesses to create agreement workflows without writing any programming code, so it's useful for quickly adding identification mechanisms and web forms into contracts. And there's AI-Assisted Review, which analyzes agreements to uncover potential risks and opportunities, and can be trained to meet the standards of any organization.

Docusign says some customers have reduced the time it takes to create agreements by more than 90% thanks to IAM, which unlocks substantial cost savings. That's why 25,000 businesses were using the platform as of Oct. 31, which was up 150% since April alone.

Docusign's profits are growing rapidly

At the height of the pandemic in 2020 and 2021, management was spending heavily on costs like marketing to attract as many customers as possible, which led to blistering-fast revenue growth. However, the company was losing truckloads of money at the bottom line, which wasn't sustainable, so it's now sacrificing top-line growth to focus more on profitability.

Docusign generated $818.4 million in revenue during its fiscal 2026 third quarter (which ended Oct. 31). Despite being only a modest increase of 8% from the year-ago period, it was comfortably above the midpoint of the company's guidance, which was $806 million.

In fact, the result prompted management to slightly raise its full-year revenue forecast for fiscal 2026. It now expects to bring in $3.21 billion for the year, compared to the previous guidance of $3.195 billion.

But the real story was at the bottom line in the third quarter. Docusign generated a profit under generally accepted accounting principles (GAAP) of $83.7 million, a 34% jump from the year-ago period. After stripping out one-off and noncash expenses, the company also delivered an adjusted (non-GAAP) profit of $211.1 million.

It has now generated almost $600 million in adjusted profits through the first three quarters of fiscal 2026. This gives the company the flexibility to start spending more aggressively on growth-focused costs to potentially supercharge its revenue if it so chooses.

Docusign stock might be cheap

The stock is trading at a price-to-sales ratio (P/S) of 4.5 as I write this, which is a steep discount to its long-term average of 12.6 dating back to when the company went public in 2018. From that perspective, it looks like a bargain.

DOCU PS Ratio data by YCharts.

However, based on Docusign's trailing-12-month GAAP earnings of $1.43 per share, its stock is trading at a price-to-earnings ratio (P/E) of 45.9. That's actually a premium to the Nasdaq-100 technology index, which trades at a P/E of 34.1, so the stock isn't cheap from that standpoint.

With that said, Docusign is still early in its transition to profitability, and if it continues to grow its GAAP bottom line by over 30% like it did in the third quarter, then it won't be long before its stock looks inexpensive on a P/E basis.

Based on the incredible momentum in Docusign's IAM platform right now, this could be a great time to take a position in its stock. Those who are willing to hold on to it for at least a few years might be glad they bought it at the current level when they reflect back on this moment.

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Docusign. The Motley Fool has a disclosure policy.