DocuSign (DOCU) is a leader and pioneer in the e-signature field. The company also offers services throughout the process of documenting agreements including document generation, analytics, and notary services.
I am Neutral on DOCU stock. (See Analysts’ Top Stocks on TipRanks)
E-signature Trends Accelerated by Pandemic
The pandemic had many effects on commerce. In some cases, trends that were already in progress were significantly amplified. These include remote working, grocery delivery, ecommerce adoption, and paperless transactions. Along with paperless transactions comes the increased need for e-signature services. E-signature was already the way of the future before the pandemic; it was simply accelerated by COVID-19.
DocuSign grew revenues almost 39% in the annual fiscal period directly prior to the pandemic. Note that DocuSign has a January 31 fiscal year end so, for example, FY21 is the period February 1, 2020 to January 31, 2021. The pandemic provided a catalyst for adoption and revenues grew over 49% during FY21.
The critical component here is that DOCU was in high growth mode prior to the pandemic. E-signature adoption is not something that will reverse once the dangers of COVID-19 have lessened. It is here to stay and DocuSign is the premier provider.
More than E-sig to DOCU
Along with the signature portion of a document, DocuSign also provides a platform to “prepare, sign, act, and manage” an agreement between parties. This gives the company a $50B total addressable market. With annual revenue in FY21 of $1.45B, this allows for plenty of room to grow.
To that end, the company is expected to grow revenues over 40% again in the current fiscal year – FY22. DocuSign is smartly investing in increasing its service offerings to continue to outpace growing competition. Other service offerings that are being expanded or introduced are notary and insight services, which utilize analytics and artificial intelligence.
Better Entry Points Might be Coming
DocuSign currently trades at a price-to-sales (PS) ratio over 28x and a forward PS ratio over 24x. These are quite high, although not unheard of in the world of growth stocks.
The stock has also pulled back over 15% from its all-time highs. Investors are likely concerned that the pandemic tailwinds will slacken and growth will slow significantly, despite aggressive estimates. This pullback began in earnest in September 2021 and may have further to go before the trend reverses. For this reason, it is advisable for investors to enter incrementally and cautiously.
Turning to profitability, it appears DocuSign is on the cusp of becoming net profitable. The company’s last quarterly report shows losses of just over $25M and operating losses of over $22.5M. For an enterprise this size, this is essentially breaking even. This bodes well for becoming profitable in the very near future, as the company continues to scale. GAAP profits may be the catalyst the stock price needs to reverse the downtrend.
Analysts Weigh In
Wall Street analysts are extremely bullish on DOCU stock, with a Strong Buy consensus rating, based on 15 Buys, no Holds, and no Sell ratings.
The clean sweep of Buy ratings is quite telling.
The average DOCU price target of $341.08 implies 30.4% upside potential.
DocuSign Summary
DocuSign is not just a pandemic stock. The company was growing very quickly prior to COVID-19, and management is confident this will continue post-COVID as well. E-signature services are also not a temporary fix, rather they will be the norm. The trend has simply accelerated.
DocuSign is rightly expanding offerings as competition heats up. While there is much to like, the valuation is quite high and investors may be taking profits in the stock. The downtrend is strong and there may be much better entry points on the horizon for those looking to invest in DOCU stock.
Disclosure: At the time of publication, Bradley Guichard had no position in securities mentioned in this article.
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