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DocuSign Stock: Not Cheap, but Worth a Look
Stock Analysis & Ideas

DocuSign Stock: Not Cheap, but Worth a Look

DocuSign (DOCU) empowers companies to conduct business quicker with less risk and lower costs, while providing a more pleasant experience for customers and employees.

The company achieves this by reconstructing the foundational ingredient of conducting business: the agreement. Since agreements happen all the time in the usual course of doing business, companies sign contracts with other parties.

This holds for any organization, of any type and size. Therefore, DocuSign’s total addressable market is virtually boundless.

The company has been growing its top line consistently over the past few years at a rapid pace, with the stock significantly outperforming the overall market.

While DocuSign is certainly not cheap, shares could run further from their current levels as we advance. I am bullish on the stock. (See DocuSign stock charts on TipRanks)

Excellent Growth Rate Continues

DocuSign’s most recent quarterly results featured another period of excellent growth, with the company growing revenues by 50% to reach a new all-time high top line of $511.8 million.

The company’s non-GAAP adjusted earnings per share grew 176% year-over-year to $0.47, 17.5% higher than the consensus forecast of approximately $0.40.

While DocuSign’s year-over-year revenue growth slightly retreated from 57.9% sequentially to around 50%, Q2 2021 marked the fourth consecutive period in which the company achieved sales growth north of 50%.

For context, the company’s quarterly revenue growth hovered between 30% and 40% in FY 2018 and FY 2019. We can, therefore, easily conclude that the pandemic has hastened the transformation towards digitalization, boosting the need for DocuSign’s e-signature product.

DocuSign’s growing revenues are also of great quality. Specifically, 96.3% of the company’s revenue is subscription-based. This should allow for great cash flow visibility in the medium term, and enhance the company’s gross margins further from their already elevated levels of around 78%.

Penetration in underserved regions should serve as a strong catalyst for DocuSign’s revenue growth going forward. While DocuSign offers its services in more than 180 countries, it only has a direct presence in Canada, Australia, the U.K., France, Germany, Japan, Brazil, and Mexico, outside of the U.S.

Valuation

Having an industry disruptor growing at such impressive rates with rich gross margins should instantly translate to a rich valuation multiple, and this holds true for DocuSign.

The stock is trading at a forward P/S of 21.3, which is certainly not a cheap multiple. That said, the company has sustained its impressive expansionary pace for several years now.

Wall Street’s Take

Turning to Wall Street, DocuSign has a Strong Buy consensus rating, based on 15 unanimous Buys assigned in the past three months. At $340.29, the average DocuSign price target implies 32.2% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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