DocuSign, Inc. Investment Thesis

DocuSign, Inc.

Ticker: $DOCU

Sector: Technology

Market Cap: $50.2 billion

Overview

DocuSign is a company that allows organizations to manage electronic agreements. DocuSign first pioneered the development of e-signature technology and is the undisputed leader in this space with an estimated 70% market share. 

However, DocuSign is much more than that and helps organizations connect and automate how they prepare, sign, act on, and manage agreements. As part of the DocuSign “Agreement Cloud”, organizations can manage the entire life cycle of contracts and documents. The e-signature market alone is expected to reach $25 billion and with the inclusion of the Agreement Cloud doubling it to $50 billion. 

DocuSign’s value proposition is simple: legacy, paper-based agreement processes are manual, slow, expensive, and error-prone. DocuSign eliminate the paper, automate the process, and connect it to all the other systems that businesses are already using allowing companies to now measure turnaround time in minutes rather than in days, substantially reduce costs, and largely eliminate errors.

DocuSign’s cloud-based platform allows companies of all sizes and across all industries to quickly and easily make nearly every agreement, approval process, or transaction digital - from almost anywhere in the world, on practically any device. 

Customers

DocuSign has leading brands as customers including Netflix, Microsoft and Apple. The customers are not concentrated in any one industry and range from insurance to technology to real estate. In addition, DocuSign has over 800,000 individual customers with over 500 customers generating >$300,000 in revenue suggesting that revenue is not overly concentrated in any one customer. 

DocuSign has received glowing reviews on the review site SoftwareAdvice.com. With over 4,000 individual reviews, DocuSign has an average of 4.74 out of 5. Some of the recurring themes include:

  • Easy to navigate through and user friendly

  • Secure and safe when sending documents over the web

  • Time saved not having to print, sign and scan

Capitalisation

DocuSign went public on the 26th April 2018 raising an initial $629 million through an IPO valuing the company at $4.4 billion. Today the market market cap is $50.2 billion meaning if you had invested at the IPO date you would have over 11x your initial investment in less than 3 years. Despite this performance the company is still very much a growth stock.

Revenue and Margins

DocuSign has been growing revenues at a really impressive rate whilst maintaining its high gross margins. During its most recent financial results for the Q3 fiscal year 20201:

  • Revenue was $382.9 million, an increase of 53% year-over-year. Subscription revenue was $366.6 million, an increase of 54% year-over-year. 

  • Professional services and other revenue was $16.3 million, an increase of 43% year-over-year. 

  • Gross margin was 74% compared to 75% in the same period last year. 

This level of growth and margins is not a once off as DocuSign has a demonstrated track record when we look back over last 2 years

Management have also estimated Revenue for 31/01/2021 to increase by 47% year-on-year.

Valuation Multiples

DocuSign is a growth stock and by its nature trades at high valuation multiples. As DocuSign is not yet profitable the P/E ratio is not a relevant valuation metric. Below are some of the key valuation metrics that I have identified

While the valuation multiples here are on the high side, it is positive to see that all three ratios based on the most recent financial results have improved. 

Balance Sheet

Commentary

  • Almost $375 million in cash and cash equivalents

  • No inventory on the balance sheet which is not surprising given that this is a software company

  • Total Liabilities as % of Total Assets of 79%

  • Current Assets to Current Liabilities ratio of 1

  • Goodwill balance making up almost 17% of total assets arising from a number of acquisitions most notably Liveoak Technologies and Seal Software in 2020

Stock Price History 

Having grown steadily in share price since its IPO the stock hit an all time high in September 2020. Since then, the stock has been more or less trading sideways and growing into its valuation. 

Competitors

As mentioned in the overview, DocuSign is primely positioned in terms of its addressable market with a 70% share of the e-signature market. One of the main competitors in this space is Adobe. Adobe offers electronic signature through its Adobe Sign product.  Adobe Sign is part of the Adobe Document Cloud product line, along with Acrobat, Reader, Send, PDF Pack and Scan. For Q3 2020 the Document Cloud product line recorded revenue of $375 million. Unfortunately, Adobe doesn’t split out this product line further so we cannot tell how much of this revenue relates to Sign.

When we look toward the broader contract life cycle management market, Gartner published a Magic Quadrant for this market in February 2020. Gartner placed DocuSign in the leader’s quadrant and they occupied the highest position in ability to execute.

Management and Ownership 

DocuSign was founded in 2003 by Court Lorenzini, Tom Gonser and Eric Ranft. However, none of the current founders are part of the executive team. Daniel Springer is the current CEO having been appointed in January 2017. 

Daniel Springer has had a long career in leadership positions at a number of software and technology companies. His most significant achievement was at Responsys, where he served as CEO from 2004 to 2014. He joined Responsys in the start-up phase and grew it to a leading cross-channel marketing platform. Responsys went public in 2011 (MKTG) and was later acquired by Oracle in 2014 for $1.6B. 

Daniel Springer appears to be exceptionally well received at DocuSign with a 98% approval rating on glassdoor with the company overall scoring 4.7 out of 5 by its own employees. 

Ideally, I prefer when a growth stock is still founder led but Daniel Springer seems to be doing a pretty good job so far.

Risks

  1. Competition

The paper-to-digital transformation isn’t anything new and has been around for a while.  A number of companies, like Adobe who I have referenced already, and their Document Cloud offering, have formidable presences and strong products in this space. This competition won’t die down anytime soon. If anything, it will pick up. So far, DocuSign has been able to brush aside these competition risks. This is mainly due to it being a small company operating in a very big market. As the company gets bigger, it will more aggressively rub elbows with competitors. This could cause customer and revenue growth slowdown in the coming years.

  1. Valuation

Shares trade at a Price/Sales ratio of 31. Even for a hyper-growth software company this is a rich valuation. It’s especially rich for a hyper-growth software company with competition, growth, and margin risks. Despite having strong growth and gross margins, DocuSign is not yet profitable on the bottom line despite having positive free cashflow. 

Opportunities

  1. Artificial Intelligence Capabilities

DocuSign’s AI-powered contract analytics has the potential to revolutionize the negotiation process. DocuSign Analyzer takes Insight’s advanced contract analytics and applies them to the pre-execution phase of agreements, to help your legal and business teams negotiate better agreements, far faster than traditional methods can enable.

  • AI-based clause analysis for incoming agreements

  • Risk scoring of contract content to guide fast action

  • Automatically recommending replacement language for risky terms from your organization’s pre-approved clause library 

A single 50 page document that might take a human a couple of hours to review can be completed by AI in a couple of clicks with the results appearing in minutes. This results in significantly reduced human review time and ensures consistency of response, whilst simultaneously mitigating risk.

  1. Green Movement

DocuSign has created a more eco-friendly environment by reducing consumption of approximately 837 tons of paper or nearly 14,230 trees. The DocuSign electronic signature service has significantly reduced businesses reliance on traditional, more antiquated methods of communication by revolutionizing the way documents are shared, signed and stored. 

DocuSign eSignature service eliminates the need to print, fax, scan, mail and store paper documents by providing a fast, green, easy-to-use electronic document signing process. Green policies are becoming more and more mainstream and my view is that paper is going to be a thing of the past.

Investment Strategy

DocuSign currently commands a leading position in a large addressable market. With the ongoing digital transformation, the demand for convenient, online and automated agreement processes is accelerating. While I expect more competition in the future, DocuSign has the capabilities and knowhow to be a leader in the contract lifecycle management space. Further ahead, as more electronic agreements are negotiated and executed online, ongoing security and monitoring will be a further service that DocuSign can cross sell. 

I opened a position in early January of this year when the stock closed at $222.41 which was below the 50 day moving average of $226.23. Having tested this line of resistance, the stock had pulled back to an appropriate level to me in terms of risk and reward. Since then, the stock has increased by 18% and currently trades at $262.98.


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Happy investing

Wolf of Harcourt Street

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Disclaimer: I am not a financial adviser and I am not here to give specific financial advice. The opinions expressed are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The information is based on personal opinion and experience, it should not be considered professional financial investment advice. There is no substitute for doing your own due diligence and building your own conviction when it comes to investing.