DocuSign (DOCU) allows companies to conduct business quicker with less risk and lower costs while providing a more pleasant experience for customers and employees. DocuSign’s platform has redefined how digital agreements are executed, making this process secure and frictionless. The company’s platform has become increasingly helpful for businesses during the ongoing pandemic.
In my view, DocuSign’s growth will remain strong for years, even if the current tailwinds created by the pandemic were to fade. Since all types of businesses need to set up agreements, the company’s total addressable market is essentially limitless.
DocuSign’s growth has been consistently impressive over the past few years, with revenues snowballing by the quarter. Shares of DocuSign have lagged the overall market during the past few months, with investors likely questioning the stock’s valuation.
Considering DocuSign’s robust Q2 results and the modest valuation compression, I believe the stock makes for a compelling investment case. I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
Revenue Growth and Profitability
As a reminder, DocuSign’s most recent quarterly results included exciting revenue growth of 50%, leading to a new all-time high top line of $511.8 million. Impressively, this was the fourth sequential period in which DocuSign reported sales growth north of 50%, despite the meager slow down compared to the previous quarter.
DocuSign reported non-GAAP adjusted EPS growth of 176% year-over-year to $0.47, beating consensus estimates by 17.5%.
With digital agreements coming in increasingly handy during the ongoing pandemic, DocuSign’s performance has accelerated substantially over the past couple of years. The company used to grow revenues between 30% and 40% in 2018-19, so seeing it retain a growth of 50%+ over the past year is quite noteworthy.
In my view, with the pandemic essentially increasing global awareness of the benefits that come with digital agreements over the traditional method, DocuSign’s revenue growth is likely to remain at these levels in the medium term, hence retaining its current accelerated growth.
Regarding the company’s profitability, one could criticize DocuSign’s consistent absence of profits. However, besides the fact that the company needn’t be profitable considering how fast it grows, DocuSign’s negative bottom line on a GAAP basis is due to its high levels of stock-based compensation.
In fact, DocuSign has been profitable from an operating cash flow perspective since 2017. Operating cash flows have amounted to a positive $432.9 million over the past four quarters, including $345.7 million of stock-based compensation (a non-cash item).
With a gross profit margin near 80%, the company will have plenty of room to report juicy profits once its operations scale in the medium to long term.
The Valuation Following the Price Drop
DocuSign’s valuation has been rich since the company first went public, which is justifiable considering the company’s exciting growth rates.
The stock is currently trading at a forward (January 2023) price/sales ratio of 18.4x, which is unquestionably an expensive multiple. However, considering that the company has retained its impressive 50%+ growth pace for several quarters now, the forward price/sales multiple is not unreasonable as well.
Wall Street’s Take
Turning to Wall Street, DocuSign has a Strong Buy consensus rating based on 15 Buys and one Hold assigned in the past three months. At $336.36, the average DocuSign price target implies 36.5% 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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