DocuSign (NASDAQ:DOCU) stock has been a major beneficiary of the remote workforce trend that has emerged during the pandemic. However, the company is far from being a one-hit wonder tied to COVID-19. Growth was strong prior to 2020 and the recent events have only accelerated what was already an excellent long-term growth story.
A look at the monthly chart reveals DocuSign is riding a 12-month streak of green dating back to September of last year.
Shares of the San Francisco-based technology upstart jumped $45 on September 1st in reaction to the Zoom Video's blowout earnings report. To put this in perspective, this increase was more than where DocuSign stock traded when it made its market debut at $38 in April 2018.
This is an indication of how much the market has had to play catch-up. Now that DocuSign no longer flies under the radar, is it too late for investors to sign up?
What Does DocuSign Do?
DocuSign is the world's leading eSignature solution specialist. Although it only recently became a public company, it has been a pioneer of the paperless agreement process since 2003. It provides a range of software solutions that has changed the way enterprises prepare, sign, and manage agreements through its Agreement Cloud platform.
The value proposition here is that DocuSign's integrated software allows customers to more efficiently and cost-effectively execute contracts and other agreements. This is a process that has traditionally been done by passing paper documents back and forth.
Users can sign and manage documents electronically from any device, anywhere, and at any time. DocuSign's fast-growing customer base of has swelled to over 600 thousand and includes a broad industry representation. Many of the world's largest pharmaceutical, financial, and technology companies are DocuSign customers.
DocuSign is continually launching new products. The late 2019 timing of its DocuSign Negotiate solution for small businesses couldn't have been better. Small business owners have turned to the product as a way to cut costs and stay alive in the current economic environment.
A key performance indicator (KPI) for a cloud-based software company such as DocuSign is billings. This combines subscription renewals, add-on business from existing customers, and sales from new customers. Since most DocuSign customers pay up front annually, the company recognizes revenue over time and measures operational success through the billings metric.
Billings growth has been strong to say the least. It picked up from 36% to 40% in the final quarter before the outbreak (the period ended January 31st). Last quarter billings growth accelerated to 59% as enterprises scrambled to incorporate DocuSign solutions into their remote workflow.
This metric naturally drives revenue growth which was 39% in the most recent quarter ended April 30th. With this kind of growth, its no wonder the market has taken notice.
Due to its heavy investment in building out its brand, DocuSign's bottom line as yet to turn green- but the accelerant provided by the pandemic has made profitability closer than previously expected. The company is profitable on a non-GAAP basis.
What is DocuSign's Total Addressable Market (TAM)?
DocuSign customers and business partners have embraced the ability to have a single platform that connects and automates the agreement process from start to finish. This has given the company a solid foundation from which to build on its leadership position in the digital agreement market.
Another attractive aspect of the company is its revenue visibility. The recurring nature of its software subscriptions is clear to investors and accounts for 95% of revenue. The business model is also compelling because 82% of its contracts are for a duration of 12 months or more.
The runway for growth is long. The company estimates the global digital agreement market to be a $25 billion opportunity. It is a very under-penetrated market as there are still plenty of businesses globally that have yet to convert to a paperless agreement system. As more recognize the speed and cost benefits, the strong growth will likely continue for several years.
Is DocuSign Stock a Buy?
Long term this is definitely a stock you want in your portfolio. The company is still very much in the early stages of a huge growth opportunity.
In the short-term, investors may be able to get a more affordable entry price as the valuation is stretched here at 43x sales. The next time the stock pulls back to its 50-day moving average, ideally in below-average volume, would be an ideal time to pick up some shares.
We'll know more about whether the stock pulls back or not in the coming days with the company set to report earnings after the close on September 3rd. Expectations are sky-high especially after the stock got a major sympathy boost from Zoom's report.
If revenues and billings fall short or management issues soft guidance, we could see a major correction - and this could be the time to pounce. On the other hand, DocuSign could very well blow the top off the roof given the rapidly rising demand for its solutions in recent months.
Whichever way it goes, investors should keep this one on the watchlist -and keep the bigger picture in mind. Although DocuSign has had a tremendous run this year, it should be an even stronger company three-plus years from now.
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