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The Ratings Game: DocuSign faces ‘long path’ to a business turnaround, analyst says in downgrade

Shares of DocuSign Inc. were off nearly 4% in midday trading Monday after RBC Capital Markets analyst Rishi Jaluria downgraded the e-signature stock to sector perform from outperform, writing that he sees a “long path” as the company tries to execute a turnaround.

Jaluria likes DocuSign’s long-term story, but he sees various challenges in the short run for the company, which is currently operating without a permanent chief executive after Dan Springer stepped down in June.

“We still see a path to accelerating growth, but it requires better sales execution, new use cases, stronger international traction (especially in newer markets), and greater adoption of CLM [contract lifecycle management] and other products,” Jaluria wrote. “These turnarounds take time, and it could take several quarters, even after a new CEO joins, before we start to see signs of a successful turnaround.”

DocuSign shares are off 59% so far in 2022, as the S&P 500

has lost 12%.

Jaluria also thinks that DocuSign is plagued by numerous execution issues, including turnover among employees.

“It’s very clear in retrospect that DocuSign salespeople got complacent during COVID, with demand coming to them, as well as benefits from overages, and did not proactively generate demand or new use cases,” he wrote. “We’ve seen significant turnover in the employee base and expect that to continue with a leadership void (recall, there’s an interim CEO who doesn’t come from the world of software).”

Jaluria expects DocuSign to grow fiscal 2024 revenue by 6% and billings by 3%, and he notes that his projections are below consensus estimates calling for 11% revenue growth and 13% billings growth.

In his view, DocuSign needs to “regain credibility” with investors, a task he thinks “will take a while” given the company’s recent history.

“The fact is DocuSign has guided down billings three quarters in a row, missed its own billings guidance, and, in our view, downplayed both the benefits from overages/early renewals, as well as its total exposure to mortgages/ loans,” he wrote.

See also: Snowflake stock downgraded as UBS worries about competitive pressure, customer caution

Over the long run, Jaluria sees promise in DocuSign’s business, but he thinks the stock could tread water until the company turns its business around and shows a reacceleration in its financials.

“Additionally, while we still believe DocuSign is exploring a sale, the fact is a $20B check (~30% premium to current levels) would be tough to write for both private equity and strategic buyers, making a sale somewhat less likely now,” Jaluria wrote.

He cut his price target on the stock to $65 from $80.

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