Is DocuSign Stock Overvalued?

DocuSign Inc (NASDAQ:DOCU) is a San Francisco-based tech company that focuses on digital agreements and eSignature services. The company went public in 2018, gained 85 percent in 2019 and up 190 percent most recently.

Its customers include the top companies in pharmaceuticals, finance, and technology, with over 660,000 paying users that helped drive revenues upward during the coronavirus pandemic. An increase in remote work accelerated the push to paperless documents and made electronic signatures more important than ever.

But some analysts fear the company may not be able to sustain these cash-generating efforts. As cities reopen and the economy rebounds in 2021, there are fears that DocuSign’s high stock price will deflate. This could leave anyone jumping on board today taking a loss, leaving some to ask – is DocuSign stock overvalued?

Let’s answer that question by examining how it got here.

Why DocuSign Stock Went Up

Electronic agreements were becoming more popular even before the coronavirus crisis hit, with the e-signature market earning $951.3 million in 2019.

This market is now projected to grow by about 25 percent through the 2020s, with 75 countries already legally mandating the technology and more following suit every day.

When COVID-19 hit, municipal and economic shutdowns spread around the globe, and the need for e-signature services became even more widespread.

Business doesn’t slow down in a remote-work environment. Important legal documents like employment contracts, vendor deals, marketing agreements, unemployment applications, and more need a reliable, efficient, and secure signature solution.

Both work and school went largely virtual for the Spring and Fall semesters of 2020. While 2021 will certainly have more opportunities, the essence of this remote lifestyle will surely linger for many generations.

This environment puts DocuSign in the right place at the right time to start generating higher-than-expected revenues, which it successfully executed in the most recent reported quarter. In fact, let’s dig a little deeper into DocuSign’s financials to see how the company fared during the biggest economic crisis in recent memory.

DocuSign Financials Were Stellar

According to DocuSign’s Fiscal Year 2021 financial reporting, the second quarter growth year-over-year from calendar years 2019-2020 was 61 percent, from $252 million to $406 million.

This led to a 45 percent increase in revenues, which grew from $236 million to $342 million. Enterprise and commercial users account for 88 percent of DocuSign’s income generation, while the remainder is web and mobile users.

Approximately 95 percent of DocuSign’s revenue comes from subscriptions, and the dollar-weighted average contract length is 17 months.

DocuSign had nearly 750,000 customers in 2020, a 39 percent increase from the previous year, and that includes almost 100,000 enterprise customers.

This gives DocuSign an operating cash flow (OCF) of $118 million, with $34 million in non-GAAP operating income. Its grow margin is 80 percent in the third quarter of the 2021 fiscal year, and the company spends 16 percent on future research and development.

All-in-all, it’s on track to generate over $1.3 billion in annual revenue by the end of the year. Now it’s time to examine DOCU’s market cap and determine if it can justify its stock price.

Is DocuSign Valuation Too High?

While DocuSign spent much of 2019 and 2020 gaining value and buzz, investor sentiment is cooling off heading into the 2020 holiday season. This isn’t necessarily a bad thing – it just means analysts consensus went from a solid Buy to a Buy/Hold split as the stock price hovers in the $200 range.

Some analysts even think the price could drop back to $140-150 by the end of 2021, while others believe it’ll bounce up to $300. We’ll explore the loss side in a minute, but first let’s talk about why it could still gain.

The biggest (and slowest) potential adopter of e-signatures will inevitably be the courts and government services, although that is changing.

Courts especially are fast-tracking initiatives to be more accepting of electronic communications in the aftermath of the coronavirus.

Most municipal, state, and federal courts are backed up, and e-signatures became a cornerstone for everything from filing taxes to applying for economic stimulus relief. There’s no doubt mankind will survive COVID-19, but DocuSign CEO Dan Springer sees no reason to suddenly jump back into the stone age.

Buying DocuSign now is more of a long-term play and will yield smaller gains than it would’ve had you bought in a year, or even three months, ago. There’s plenty of room for growth as more organizations are forced to accommodate remote work. However, there are only two market events that will halt DocuSign’s growth.

Will DocuSign Stock Drop?

As the 2020 school year starts, headlines in investment circles commonly discuss DocuSign’s fall. Some analysts believe it is overvalued above $200 and that revenue growth is only temporary. In another 12-17 months when all the contracts expire, there’s a possibility those customers will choose not to renew.

But the audit trail provided by DocuSign won’t be going away anytime soon, and we may simply be witnessing the natural evolution of the shift to a paperless environment.

So long as DocuSign continues generating revenue, it has no reason to fear bottoming out. The company has solid financials, a strong product, and industry experience that puts it ahead of the pack of competitors.

That’s not to say a company like Microsoft (MSFT) or Adobe (ADBE) won’t do its best to either compete with or acquire it. In fact, competitor PandaDoc is more commonly used in legal settings, and others, like eversign, signNow, and HelloSign are also jockeying for position.

Is DocuSign Stock Overvalued? The Bottom Line

DocuSign seems to have leveled off in the $200 range, and analysts are now split on whether to Buy or Hold. The current market capitalization reflects its reported earnings, and there’s plenty of room to go as the world pushes more towards digital documentation and virtual work.

All manner of legal documents and applications must be signed these days, and with DocuSign you can do it from any device, including your phone.

While it’s not gaining as fast as it was in the beginning of the coronavirus outbreak, there’s no signs of the remote work and school environments changing anytime soon. That means even more businesses and other organizations are going virtual, and this sector should remain solid for years.

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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.