Stock Analysis & Ideas

DocuSign: A Cheaply Valued Industry Leader

DocuSign (DOCU) enables individuals and companies to conduct business faster with less risk and lower costs. The company also delivers a more pleasant experience for customers and employees alike.

DocuSign’s platform has dramatically changed how digital agreements are conducted by creating a signing process that is secure and frictionless. The COVID-19 pandemic greatly demonstrated DocuSign’s usefulness in society, further boosting the company’s growth trajectory.

While DocuSign shares have suffered great losses since December amid investor worries over growth deceleration, I believe that these concerns are overblown.

In my opinion, the company’s growth will be sustained strong for years to come, even if the ongoing tailwinds arose from the pandemic were to relax. Every business needs to set up agreements. Therefore, there is no ceiling for DocuSign when it comes to its potential total addressable market.

Taking into account DocuSign’s ongoing performance and the recent valuation compression, I feel that DocuSign shares make for a tempting investment case. I remain bullish on the stock.

Growth and Profitability

DocuSign’s latest quarterly results demonstrated robust revenue growth. Specifically, revenues grew by 42% resulting in the top line reaching a new all-time high of $545.5 million.

Some have argued that this implies a deceleration since DocuSign was previously counting four sequential quarters of sales growth north of 50%. However, I believe that this is entirely reasonable due to a tough comparison against last year’s boosted results, and it should not cause any worries.

Non-GAAP adjusted EPS came in at $0.58, suggesting year-over-year growth of 163%. Due to the company’s business model being extremely asset and capital-light, DocuSign’s profitability prospects are quite great. Gross margins remained above 80%, and as the company continues to scale, the bottom line should also be growing by the quarter amid expanding net income margins.

For its upcoming earnings, management expects revenues to land between $557 million and $563 million, suggesting year-over-year growth of around 30% at the midpoint.

Again, while it implies further deceleration, the reality is that DocuSign’s growth is returning towards the mean of its historical average.

Wall Street’s Take

Turning to Wall Street, DocuSign has a Moderate Buy consensus rating based on eight Buys, seven Holds, and one Sell assigned in the past three months. At $203.69, the average DocuSign price target implies 84.7% upside potential.


Moving forward, I believe that DocuSign will continue delivering strong growth as more businesses and individuals adjust to the benefits of digital signing.

The pandemic basically advanced the global awareness of the advantages that come with digital agreements compared to the traditional method. Clearly, we are moving in this direction. Since DocuSign is the leader in this field, the company is well positioned to reap the fruits of this trend in the coming years.

The stock is currently trading at a forward (January 2023) price/sales ratio of 8.34x, which is significantly softer than its historical average while hardly accounting for the company’s growth prospects and high-margin business model.

Hence, I wouldn’t be surprised if a valuation expansion were to occur as soon as the ongoing sell-off in the tech sector eases.

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