DocuSign (NASDAQ: DOCU) has been a pandemic winner that has seen its growth carry over into 2021. DOCU stock is up 33% this year, easily outpacing the S&P 500 index which is up 22%. And heading into its earnings report on September 2, DOCU stock looks to be consolidating. This usually signals that the stock is ready to make a move.
Back in June, I saw a similar consolidation. At that time, I thought the stock was a good long-term bet, but not so great for day traders. Turns out it was good for both. DOCU stock is up 17% since that article was posted. This time around, I’m expecting the stock to get a bullish lift from what is likely to be a strong earnings report.
Growth is Slowing
Year-over-year growth remains strong. In fact, analysts are forecasting the company to deliver 40 cents in earnings per share on quarterly revenue of $488.7 million. That will be a 42% year-over-year (YOY) increase. And what adds more meaning to that number is that in 2020 DocuSign’s revenue grew 45% YOY from the same quarter in 2019.
This illustrates the tough comparisons many SaaS companies are facing in 2021. Can growth be sustained? In terms of YOY growth, that question appears to be a resounding yes. But in terms of sequential growth, the story is not as good.
To be fair, DocuSign is still growing revenue. But if it delivers the $488.7 million that analysts expect it will only have increased revenue by 4% from the prior quarter. A comparison to the same quarter-over-quarter growth in 2020 shows a gain of 15%. However, since the company’s growth was juiced by the pandemic, I went back to 2019. There I found that the company had grown revenue by 10%.
On balance, I’m not sure if this is anything to be concerned about. But the thing about statistics and data is that people can use them to support whatever conclusion they want. I simply mention it because it’s a fair observation.
More Than a Signature Company
The slowing quarterly growth would concern me more if DocuSign was “only” an e-signature company. It’s true that the company still generates a significant amount of its business from that service. But the company is evolving into other areas.
Specifically, it’s involved in the area of contract lifestyle management (CLM). DocuSign has its “Agreement Cloud” that is helping prepare contracts and take their documents through the entire process. The company still has over 12 applications and more than 350 integrations.
This is how DocuSign estimates its total addressable market to be over $50 billion. To put that into perspective, analysts are forecasting DocuSign to clear $2 billion in sales this year ($2.05 billion) which leaves plenty of runway for revenue growth.
DOCU Stock Looks Like a Buy
If you think that DOCU stock is overvalued, I won’t try to change your mind. The stock is looking pretty expensive right now. However, year-over-year growth remains strong. And as the saying goes, it’s not bragging if you can back it up.
DocuSign is at the forefront of two trends. First, the company’s technology satisfies the desire to automate and allow many formerly in-person transactions to be executed remotely. And as our nation’s push towards clean energy gains momentum, DocuSign can point to its technology as being responsible for saving over 20 billion pieces of paper and 608,000 barrels of oil.
Neither of those attributes is unique to DocuSign. And skeptical investors will point to the fact that the company doesn’t have that large of a moat. But that’s not being reflected in the company’s retention numbers. And with the company branching out into other areas, DOCU stock is safe to buy despite what may be seen as a lofty valuation.
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