In Q3, billionaire Stanley Druckenmiller’s Duquesne Family Office added 396,000 shares of digital signature giant DocuSign (NASDAQ:DOCU) to its portfolio. T
he buy followed even larger blocks of the stock purchased in both Q1 and Q2, bringing Druckenmiller’s position in DOCU to over $100 million. Why did Stanley Druckenmiller buy DocuSign, and does the stock still look like an attractive option for investors?
Is DocuSign Undervalued?
At first glance, DocuSign doesn’t look like a traditionally undervalued stock. Shares of the business are trading for 48.3 times earnings and 4.4 times sales, though the price-to-operating-cash-flow ratio is noticeably more reasonable at 14.5. Even so, it’s clear that DocuSign is trading at a substantial premium based on its current performance.
Analyst forecasts, however, tell a very different story when it comes to DOCU’s valuation. Price targets for the stock range from a low of $77 to a high of $124, with the consensus average sitting at $93.75.
With shares now trading at just $64.01, this implies an upside of anywhere from 20 percent to over 90 percent, with the average being at about 46 percent. Despite this seemingly high implied upside, though, analysts are somewhat cautious on DocuSign, with 15 of the stock’s 19 outstanding ratings recommending it as a hold.
The fact that analysts are expecting such large gains from DocuSign in spite of its currently high valuation can be chalked up to the strong growth the business could deliver over the next several years. On a 5-year basis, analysts expect earnings per share to rise by about 12.3 percent annually. This implies earnings of roughly $2.38 in five years’ time, using the current trailing 12-month EPS of $1.33 as a starting point.
How Big Can The Digital Signature Market Get?
Crucially, DocuSign’s double-digit expected earnings growth is the function of what is projected to be a strong period of growth in the digital signature market overall. The market, as a whole, is expected to grow at a CAGR of almost 40 percent through 2030 as more and more business moves to the digital sphere. With a market share of over 50 percent, DocuSign stands out as one of the leading beneficiaries of this growth trend.
What Druckenmiller’s Broader Strategy May Show
The decision to add DocuSign may well be a play on its potential long-term value and its dominance in a fast-growing industry alone, as Druckenmiller notably employs a combination of macro and value investing to outperform the market. A look at the overall Duquesne portfolio, however, may reveal an additional reason for building the DocuSign stake.
Until earlier this year, Druckenmiller had significant stakes in AI pure plays NVIDIA and Palantir, allowing his portfolio to capture some of the gains that came along with surging AI enthusiasm. As what increasingly appears to be an AI bubble has formed, however, Druckenmiller has exited his positions in both stocks.
Instead, Druckenmiller seems to be buying tech stocks that have AI exposure but that aren’t inherently AI-centric businesses. Good examples of this approach can be seen in other stocks Duquesne acquired in Q3, notably Taiwan Semiconductor Manufacturing and Amazon. Both of these businesses are closely tied to the emerging AI market and have the potential to grow along with it, but neither is fully dependent on AI. These stocks also command smaller valuation premiums than the likes of NVDA and PLTR, potentially indicating that Druckenmiller is retreating from high-value AI pure plays in favor of more reasonably priced tech alternatives.
DocuSign seems to fit neatly into this category as a business that is deploying AI, but isn’t an exclusive play on the technology. As part of its ongoing innovation, DocuSign has introduced Iris, an AI engine that its users can leverage to more efficiently negotiate and close agreements. While AI will likely be a growth driver for DocuSign, the business is still valuable on its own merits and may not be subject to a massive selloff if investors rethink the valuations of AI businesses.
Why Did Stan Druckenmiller Buy DocuSign?
Taking everything into account, Druckenmiller’s decision to buy DocuSign was likely the result of a combination of factors. To begin with, DocuSign’s valuation is attractive on the basis of its probable growth alongside the digital signature market in the coming years.
That growth argument is further bolstered by DocuSign’s strong market position and the moat it enjoys as the dominant e-signature software provider.
Turning to the macro, Druckenmiller is most likely to have purchased DocuSign for its ability to generate strong growth from AI without carrying the risks of a pure AI business.
The decision to sell Nvidia and Palantir while purchasing stocks like DocuSign, Amazon and TSMC likely indicates that Druckenmiller is among the growing group of investors who believe that AI-driven valuations have gotten out of control. Another macro factor that may have played into the buying decision is the projected reduction of the Fed’s interest rates to about 3.4 percent by the end of next year, a move that would benefit high-growth stocks like DocuSign.
As far as whether DOCU is still a good buy today, it’s worth noting that the current share price is well below Druckenmiller’s average cost basis of about $84.30.
If Druckenmiller’s assessment of the stock is correct, investors who buy into DOCU today could actually get an even better price on it than Duquesne did. DocuSign also still appears to have respectable fundamentals, with a trailing 12-month net margin of 9.1 percent, a return on equity of 14.1 percent and only about $127 million in long-term debt against over $800 million in its cash reserves.
Moreover, DocuSign hasn’t had a single quarter of negative year-over-year revenue growth since it went public in 2018.
All told, DocuSign may still be worth looking at for investors who are comfortable with risk stemming from a high valuation in exchange for a chance at strong long-term growth. DocuSign’s ongoing revenue expansion, respectable profitability and moat within a fast-growing industry could all help the stock to recover the ground it has lost and move gradually higher. Though it may not deliver huge near-term gains, DOCU could prove to be a decent source of long-term compounding returns.
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.