DocuSign has significant issues to resolve when reporting income

DocuSign (NASDAQ: DOCU) continues a long and painful decline that began almost exactly one year ago in September 2021. What a different time that was! DOCU stock was trading over $300 and was fueled by a pandemic tailwind.

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But in 2022, that tailwind turned into a strong headwind. The question is, what can DocuSign do for a callback? DocuSign aims to reach $5 billion in revenue. However, this would mean that the business would have to generate more than double the revenue it currently generates.

Perhaps the company's September 8 earnings report will provide some clues. Investors will be looking for growing income to be sure. But they will also want to see the business return to profitability. Earnings per share have turned negative over the past two quarters.

I think Jea Yu was asking the right question in his article: "How Low Can DocuSign Go?" As painful as it may be for investors who jumped on DOCU stock in the middle of its rally, my fellow MarketBeat contributor was right, it's important for investors to be mindful of the bottom at this time. Here are some reasons to support this thought.

Build more use cases

DocuSign became pandemic stock because it forced all businesses to adopt a digital model in weeks rather than years. With DocuSign being the undisputed leader in the electronic signature category, companies needed to do business online. But it also came with the question, what's next?

DocuSign's answer to this question is the Cloud Agreement. As DocuSign says, the Agreement Cloud gives a business "everything you need to connect and automate your entire agreement process." By this, the company means not just electronic signatures, but the creation of entire "smart contracts" online, including tracking negotiations, agreements, changes, etc.

Of course, hearing the words “smart contract” immediately makes me think of blockchain and all the possibilities that keep emerging within it. However, with the cryptocurrency world having its own set of issues, that may be a concern for another day.

That doesn't mean DocuSign isn't growing. Last quarter revenue increased 25% year over year. While the growth rate is expected to slow, the company has a customer base that will allow it to continue to generate steady revenue.

But stable doesn't allow the company to reach its $5 billion goal. It also won't do much to excite growth-minded investors.

Can you teach an old dog new tricks?

A cliché works because it points to a truth. And this truth was conveyed by analyst Jim Cramer. Whether he agreed with him or not, he argued that DocuSign may have missed an opportunity to grow through acquisitions in related areas such as identity and cybersecurity.

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And that raises another question that continues to plague the company. I.e. are they establishing themselves as an acquisition target? As Jea Yu wrote in the article I'm referring to above, the abrupt departure of the company's CEO in June lent more weight to this theory.

DOCU stock is more like a trade than an investment

With a beta of over 1 (1.21) and a short interest of over 8%, it looks like traders can have a great time with DOCU stocks. It's also a reason to stay away.

I consider DocuSign on hold for now. There are too many things unclear about their growth strategy, not the least of which is the appointment of a new CEO. But I also believe there might be some value in buying stocks if the stock fell below $50 per share. At this point, you might legitimately start wondering if the floor is too low rather than what the ceiling might be.