Docusign Investment Thesis

DocuSign is an electronic agreements and eSignature provider that operates across the entire globe and in every conceivable industry and segment. Its technology is foundational to many aspects of business, including sales, marketing, legal, finance, human resources and procurement.

The company estimates that the total addressable market for its services to be around $50 billion, and, relative to its competitors, it accounts for about 70% of the eSignature trade within this market.

COVID Sparked A Boon In eSignatures

During the COVID-19 crisis, many companies have learned how to continue operations with a reduced workforce.

They also learned how to function while outside of their traditional office spaces and working environments and they figured out to leverage software solutions to get the same stuff done under less-than-optimal conditions.

Plus, they came to the realization that they could run with a distributed and remote workforce on a semi-permanent basis.

Perhaps most importantly, companies simply passed the proof-of-concept test that radical departures from “normal” working practices actually worked. 

And it’s here that a business like DocuSign really came into its own. Where an innovation like an electronic contract before COVID-19 might be seen as something novel or exotic, after COVID-19 it was seen as something both essential and run-of-the-mill.

Physically signing a contract is great, as far as it goes, but why bother wasting time and resources when it’s cheaper and easier to do it online? There isn’t really an adequate or convincing answer to that question.

DocuSign Vs Adobe Sign Vs HelloSign

There is no shortage of alternatives to DocuSign in the eSignature market space, but not all competitors are made equally. Depending on what a customer is looking for, DocuSign might not always be the perfect fit.

For instance, Adobe Sign is preferred by some users because of its ease of use and integration with other Adobe applications, such as Adobe PDF and its Creative Cloud suite. 

Or take HelloSign, another eSignature solution, which is owned by the team over at Dropbox (DBX). HelloSign offers a simple, easy application geared towards smaller enterprises, and its free version is especially favored by individuals and those companies who only need electronic contract support on an infrequent basis.

Despite the many other options on offer, including Citrix, RPost, and eSign Genie, DocuSign is by far the dominant player in the sector.

And this counts for a lot: DocuSign has been around for a relatively long-time – since 2003, to be precise. That makes it practically ancient in the tech world. Because of this, DocuSign has a strong “legacy” effect with many companies; it is known and trusted by those who use it, and its familiarity means it won’t be replaced anytime soon. 

Furthermore, DocuSign is just a very good company. Its customer service is excellent, and it continues to innovate in ways that offer value for those who pay money for its platform.

So, from an investor’s perspective, it’s fairly safe to say that DocuSign’s place at the top of the table won’t be assailed for some considerable time. It’s moat is deep, if not particularly wide.

DocuSign Share Price Volatile But Growth Is Strong

Technology firms that are bucketed into the trend towards virtualization experience more volatility than most, in both directions. During selloffs, DocuSign isn’t spared, either; DOCU share price has been known to fall 20% in weeks. 

But outside of this price downturn, DocuSign’s financial health has been in good shape.

Year-on-year revenue growth rates were stellar at 44%, and latest revenue figures beat expectations by $21.59 million with total revenue of $382.92 million. Earnings-per-share of $0.22 also beat the Street’s estimate by $0.09.

There was extremely optimistic news when it came to the company’s free cash flow (FCF) numbers. Despite having a negative FCF in the equivalent previous quarter of $14.1 million, DocuSign managed to turn this round to post a positive FCF of $38.1 million this time round.

An increase in subscription revenue of 54% year-on-year no doubt contributed to this, as would have an increase of 63% in billings of $440.4 million year-on-year as well.

DocuSign also reported a raft of new developments and products by the company during the third quarter.

Among many highlights was the news that DocuSign had updated its iOS eSignature app, was rolling out its DocuSign Analyzer to provide AI analysis to electronic contracts, and that its DocuSign Agreement Cloud 2020 Product Release 3 was ready for market.

DocuSign Profitability Concerning To Investors

One main concern with DocuSign’s business model – indeed, with any Software-as-a-Service model (Saas) – is the fact that the continued expansion of the enterprise in predicated on growing its customer base in perpetuity.

DocuSign has so far never been profitable, and that should be seen in light of the fact that the company already has a very large customer base. 

Add to this the reality that the electronic agreements industry is still new, and that DocuSign has had rapid growth because of this, and its lack of profitability appears even more concerning.

And although DocuSign is certainly the major play in the eSignature field – and will remain so for the short-term – the mid-term implications are not as clear.

Industry analysts expect the firm to become profitable after 2023 – but this raises the question as to whether or not DocuSign can maintain its dominance in such a way to get to this point in as healthy a state as it currently exists.

Again, with SaaS companies that rely on a cloud infrastructure to host their operations, DocuSign is at the mercy of third part data hosting enterprises that might not deliver on performance or security. For such a company like DocuSign where security is paramount, this could prove a fatal weakness going forward.

DocuSign Investment Thesis: Conclusion

DocuSign’s subscription base is enormous. It has over 800,000 paying customers, and with the change in working practices arising out of the COVID-19 pandemic, and the fact that businesses are increasingly becoming more and more virtual, a company like DocuSign can do nothing but benefit from these developments.

DOCU share price volatility is part and parcel of owning such a headline company. But DocuSign is uniquely poised among its peers to weather this storm. It has a solid financial footing to work from, and its business is thriving.

Investors might see this dip in price as an opportunity to accumulate a hard-working stock at a discounted value, with a view to capitalizing on gains once macro trends turn in a more favorable direction. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.