Let’s be clear on one thing: any stock that loses 80% of its value from its all-time high has inherent risks. But that doesn’t mean the company can’t invest, especially given the scale of the sell-off in the tech sector in 2022. In many cases, investor sentiment has turned so negative that losses in some stocks individual might be exaggerated.
To affirm (AFRM 5.68%) and DocuSign (DOCU 5.31%) each has their own unique challenges, but they also face undeniable opportunities. Broader economic issues like high inflation and rising interest rates have curtailed investors’ patience for promising growth stories, but with those trends potentially reversing, there’s a chance the second half of 2022 will bring some relief. better fortune to both companies. Here’s why.
The case of Affirm
Buy Now, Pay Later (BNPL) is a variation of the traditional installment loan that technology companies have developed to compete with credit cards. BNPL can offer lower interest rates, no additional fees, and an all-digital experience that integrates with a consumer’s favorite online store so they don’t have to worry about carrying a physical card.
Approximately $10 trillion in payments volume is processed worldwide each year and Affirm believes BNPL is the fastest growing segment. But if companies like Affirm want to gain traction, they must overcome difficult hurdles. Increased competition, potential regulation and an inability to generate profits are among them.
The latter is one of the main reasons Affirm stock is down 87% from its all-time high. The company reported a loss of $431 million in fiscal 2021 and a loss of $521 million in the first nine months of fiscal 2022 (ended March 31). These losses are partly due to the fact that its customers do not repay their loans. In the third quarter of fiscal 2022, Affirm had an allowance for credit losses of more than $159 million. Since BNPL is still a relatively young industry, it may take a few more years to refine the valuation models to weed out bad borrowers.
But unlike other BNPL providers, Affirm has successful deals with e-commerce giants Amazon and Shopify. This allows customers to fund their purchases with BNPL at checkout, which could lead to unprecedented growth for Affirm. Its customer base is already booming, jumping 137% year-over-year in the third quarter to 12.7 million, thanks in part to these deals.
If growth stocks return to favor with investors, Affirm could have the time it needs to get its financial house in order to stem the losses and build a healthier business. Moreover, if inflation and interest rates stop rising rapidly, this would stimulate consumer spending. A strong rally in Affirm’s share price could then be in the cards.
The case of DocuSign
DocuSign is best known as a leader in digital signature technology, but its business has expanded far beyond this single innovation. The company’s stock was a pandemic darling because its suite of digital document products went from a nice accessory to a must-have for its customers as travel came to a halt and in-person meetings were suspended.
It traded at $86 per share in early March 2020 and hit an all-time high of $314 in 2021 as the pandemic progressed. But it has since gone back and forth (and more), now trading at $63, or 80% below that high. The question is whether the sharp drop is justified given the company’s investments in future technologies, which could drive growth beyond the pandemic.
For example, its DocuSign cloud-based agreement platform serves as an end-to-end solution for negotiations in the digital age, providing the ability to create, analyze and collaborate on contracts even when parties find themselves across the world. It incorporates artificial intelligence that’s trained to spot problematic clauses to help legal teams move deals along faster, and its capabilities are likely to only improve over time.
DocuSign serves more than one billion users worldwide with 1.24 million paying customers. In fiscal 2022 (ending Jan. 31), the company generated $2.1 billion in revenue, a 45% increase from fiscal 2021. But its forecast suggests revenue will grow more modestly by 17% to $2.4 billion in fiscal 2023, which is likely driven not only by fewer pandemic restrictions, but also by the broader economic downturn. However, the first quarter got off to a flying start, with revenue growing 25% year over year.
DocuSign would also be a very profitable company based on generally accepted accounting principles (GAAP) if it weren’t for the amount it spends on stock-based compensation, which it uses to retain talented employees in a market competitive work. It spent $409 million on this position in fiscal 2022, which absorbed the majority of its $411 million in net income (profit).
It’s reasonable to expect that DocuSign will become an increasingly used part of the business toolkit as remote transaction completion becomes more commonplace for convenience. Its stock could be worth putting at that steeply discounted price for long-term investors, especially if the broader market rallies after high inflation fears ease.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Antoine Di Pizio has no position in the stocks mentioned. The Motley Fool holds positions and recommends Affirm Holdings, Inc., Amazon, DocuSign, and Shopify. The Motley Fool recommends the following options: January 2023 $1,140 long calls on Shopify, January 2024 $60 long calls on DocuSign, and January 2023 $1,160 short calls on Shopify. The Motley Fool has a disclosure policy.