DocuSign: More Than Just E-Signiature

Summary

• DOCU's share price is breaking out higher.
• Management is committed to growth opportunities.
• I am buying stock in this name.
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DocuSign (NASDAQ:DOCU) is breaking out higher on strong fundamental performance. Although there has been a board shakeup and strategic acquisitions in the short period of time the company has been public, investor sentiment remains elevated. Core growth is strong, while management tries to stay ahead of competition, adding value for customers through R&D. I am buying stock in this name with a multi-year time horizon.

Fundamental Narrative

DOCU looks attractively valued at current levels as its core-operations continue to grow, while management effectively expands into areas of potential growth, adding value for its current customer base.

The company provides cloud based transaction products and services in the United States. It offers e-signature solution that enables businesses to digitally prepare, execute, and act on agreements. DOCU serves large enterprises, sole proprietorships, small- to medium-sized businesses, professionals, and individuals.

Over the past six years, DOCU has seen its paying customer base grow at an average of almost 50% per year, according to its earnings call, with over 400,000 customers as of the most recent quarter. Its main growth lever thus far has been a successful expansion of its relationship with existing customers. Many companies use DOCU for the initial series of used cases, often one or two critical business processes that e-signature can help accelerate and simplify. Once those are successful, companies often look to bring the benefit to other opportunities and functions in their business.

During Q1, the company posted total revenue of $155.8 million, a 37% year-over-year increase, adding over 30,000 new customers across its enterprise, commercial and web and mobile businesses. The company is targeting a still large and untapped international market. Currently, business from outside the U.S. represents only 17% of its revenue, with a strong pipeline across its target market.

Outside of international growth. DOCU is developing solutions for specific industries that are heavy users of the product, expanding its user base, and deepening current relationships. For example, the company is continuing to develop its eNotary feature, allowing Notary Public to participate in the e-signature process. There are a growing number of U.S. states that allow this, most recently the State of California, according to the company’s earnings call

The company is investing in its core e-signature capabilities, implementing new features to help customers simplify the way they do business. One of its most common requests is the ability to make comment or ask questions directly inside a document created as part of an agreement, according to its earnings call. In response, DOCU built a check style interface that works in real-time and can be tied to any part of an agreement, as well as being retained as part of the agreement certification of completion.

Management is also investing significant R&D resources into a payments feature. This payment feature allows its customers to collect payment associated with an agreement right after signing. Payments can be made through credit cards, electronic checks, Apple Pay and Android Pay, as well as other methods. In the short time this feature has been active, management has seen a noticeable effect from new small business customers using PayPal (PYPL), signaling healthy demand for its new innovations, a testament to management having its finger on the pulse of the consumer.

Building off of innovation at DOCU, the company recently made a strategic acquisition of sales software startup SpringCM for $220 million in cash, further expanding its product offerings. SpringCM, founded in 2005, makes cloud software that helps companies manage sales contracts and other types of documents across desktop and mobile platforms. It has so far raised more than $127 million in venture capital funding, according to Crunchbase, with its most recent round closing in 2017. DOCU was one of SpringCM’s clients, with the acquisition allowing it to broaden its services beyond just e-signatures. DOCU will now be able to provide services for the rest of the agreement process, from preparing to sign and managing documents.

“SpringCM shares DocuSign’s passion for transforming and automating the foundation of doing business — the agreement process. By joining forces with the market leader, we can continue to simplify and accelerate the process of doing business, and drive innovation both before and after agreements have been DocuSigned,” SpringCM CEO Dan Dal Degan said in a statement.

Additionally, the company recently changed its board as a planned part of its transition to the April IPO, according to Seeking Alpha. Founder Tom Gonser and chairman Keith Krach are leaving the board at the end of the year, while Directors Scott Darling, Rory O’Driscoll, and Jonathan Roberts will leave the board on August 29, which is when three new directors will join. Incoming directors are: GoDaddy (GDDY) CEO Blake Irving, Docker CEO Steve Singh, and IBM Watson business unit GM Inhi Cho Suh. With the stock price continuing higher, it looks as if investors are viewing this as a positive development for the company.

A number of analysts have come out with bullish guidance on DOCU following its earnings call and other developments listed above, according to Seeking Alpha. Below are the calls:

• Citi (C) maintains a Buy rating on DOCU and raises the price target from $59 to $70.
• Morgan Stanley (MS) stays at Equal Weight and bumps the target by $4 to $46.
• JMP Securities (JPM) raises its target from $52 to $63 and maintains a Market Outperform rating.

Overall, the company is transforming the way business is done, cutting out a niche for itself, while continuing to reinvest in R&D to stay ahead of competitors.

Price Action

Below is a chart of DOCU dating back to its IPO. After an initial run-up higher, the company's share price corrected lower. This is common for hot IPO's, but the point of significance is that the stock price has since stabilized and looks to be breaking out higher again. The move higher comes as DOCU's board significantly turned over, while they have also made key acquisitions for strategic growth. This consolidation and breakout higher looks to be legitimate as management keeps its focus on future growth areas, with investors remaining optimistic about the story.

Source: Trading View

Conclusion

Due to DOCU's reliance on the health of both domestic and international economies, a recession could potentially weigh on its operations. Rising lending rates are a threat, potentially cutting off growth to the broader economy, nonetheless, DOCU is still in the beginning innings of its growth trajectory. Its management is showing the ability to manage its core-operations, while also exploring expansion opportunities. Moreover, investors continue to believe in the story as its share price trades higher following a multi-month consolidation. I am buying stock in this name as fundamentals drive investor optimism.

Analyst’s Disclosure: I am/we are long DOCU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.