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This Is Why Docusign Will Succeed Even Beyond The Pandemic

Mar. 05, 2021 8:02 PM ETDocuSign, Inc. (DOCU) Stock45 Comments


  • DOCU saw revenue growth accelerate in 2020 due to the pandemic.
  • The company has a strong balance sheet with ample cash and positive free cash flow.
  • DOCU trades at a rich valuation of 32 times trailing sales.
  • I outline a covered call option strategy that might make the stock easier to hold in the near term.
  • Looking for more investing ideas like this one? Get them exclusively at Best Of Breed. Learn More »

Docusign (NASDAQ:DOCU) has been one of my top stocks as it has returned nearly 400% since I last covered the company just over two years ago. DOCU has been a clear beneficiary of the pandemic, as social distancing restrictions nationwide gave mission-critical growth to the e-signature market. Can the growth continue beyond the pandemic? DOCU was capitalizing on secular tailwinds even prior to 2020, and it's arguable that the pandemic merely accelerated the growth. I expect DOCU to continue growing the e-signature market moving forward. Shares aren’t cheap and I outline a covered call strategy that can help make shares easier to hold in the near term.

Dominant Player In E-Signature Market

It’s important to understand why I'm so optimistic regarding DOCU’s forward prospects. Nearly every aspect of business involves signing some sort of agreement:

(Investor Presentation)

Traditionally, these agreements are done with paper and pen, but this process has not kept with the digital revolution. The old way of signing agreements is less efficient, more error prone, and a hassle to manage:

(Investor Presentation)

DOCU’s e-signature product is the natural solution to all the above problems. Thinking of DOCU reminds me of inevitable growth stories. Similar to how retail is moving towards e-commerce or how dating is moving online, DOCU is riding inevitable digital tailwinds.

(Investor Presentation)

While there's competition in the e-signature space, I'm not so concerned as of yet due to the large addressable market and DOCU’s place as the market leader.

(Investor Presentation)

DOCU has seen accelerating growth rates over the past year as businesses were more or less forced to move signatures online:

(Investor Presentation)

It's worth noting the difference between billings and revenue. Billings refers to the cash actually paid by the customer and revenue refers to the income earned when the service is provided. Because

You Can Do Better Than Docusign

DOCU returned 200% in 2020, but its valuation surged from 14 to 32 times sales.

If you want to find the next DOCU, then it isn't enough to search for growth: you have to find stocks with high growth while also trading at low valuations.

You want to capitalize on both growth and multiple expansion: double-dipping at its finest.

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This article was written by

Julian Lin profile picture

Julian Lin is a financial analyst. He finds undervalued companies with secular growth that appreciate over time. His approach is to look for companies with strong balance sheets and management teams in sectors with long growth runways.

Julian is the leader of the investing group Best Of Breed Growth Stocks where he only shares positions in stocks which have a large probability of delivering large alpha relative to the S&P 500. He also combines growth-oriented principles with strict valuation hurdles to add an additional layer to the conventional margin of safety. Features include: exclusive access to Julian's highest conviction picks, full stock research reports, real-time trade alerts, macro market analysis, individual industry reports, a filtered watchlist, and community chat with access to Julian 24/7. Learn more.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (38)

IFindKarma profile picture
$204 when article published. $200 now.
Cash in the mattress would have fairly just slightly better.
Julian Lin profile picture
@TechRotationIsYourFriend I didn't recommend buying the stock in this article...
Julian you mentioned DOCU was cash flow positive $234 million for the last 9 months? Was that just from operations, or did that include issuing the convertible debt? My point being if stock compensation is causing them to show a GAAP lose that is an actual noncash expense. I know it is easy to find just hoped you already knew that answer.
Julian Lin profile picture
@Dimensions I only included cash from operations. Inclusive of convertible debts, it'd be higher.
You're right - it's because stock based compensation makes up such a large part of expenses
Many investors have either forgotten or never learned the lesson from the .com bubble -- namely that if you dramatically overpay for a stock, you may have to wait for *decades* to get *even* -- even if the company is successful. Go look at the charts of INTC CSCO ORCL QCOM back to 1999/2000. And if the company stumbles you may *never* get back to even.
Julian Lin profile picture
@BoboTheDog The valuation of DOCU is much cheaper than INTC, CSCO, ORCL, or QCOM in 1999. Those companies did not have these kinds of growth rate nor market potential
@Julian Lin You are looking at them with the benefit of hindsight. Put yourself back in 1999. The market potential of INTC, by far the leading microprocessor co in 1999? Bigger than DOCU. Same for CSCO, which was the dominant Internet and enterprise networking company. Same for QCOM, which had a dominant position in mobile networking. And each of those had a FAR larger intellectual property moat than DOCU.
Julian Lin profile picture
@BoboTheDog In 2000, CSCO traded at a $503 billion market cap versus $18 billion in revenue which was growing at a 50% clip. The stock traded at 26 times revenues in spite of the fact that its revenues weren't recurring (they sold and sell switches).
While the valuations may appear similar, DOCU's current revenue base is far smaller and recurring, which are important differences.

wrote "AWS is at a much more mature stage as a company, they invest less in R&D and in new products."
Look over the last 5 years of AMZN/AWS expenditures and tell the world that AMZN/AWS is investing less in R&D. What you are saying above is BLUE LIE. Accept reality that DOCU has to make money. Otherwise it will cracking and smashed into pieces in due course. Thanks
Julian Lin
I have shown you that for AMZN - their cash engine is AWS. Now show the whole world the cash engine for DOCU! To my knowledge - the answer is in simple English NONE. That is the BIG difference. DOCU has to make profits. It has NO CASH ENGINE period. SA readers need to understand this. If they cannot understand this - they will lose money. Thanks
Julian Lin profile picture
@kalu0003 @kalu0003 AWS is profitable because they’re at the stage where it makes sense to let cash flow to the bottom line - meaning R&D isn’t growing as aggressively as before
DOCU is still growing its product suite... the fact that it is currently not profitable does not mean it won’t be profitable in the future.
We do both agree that it will never be as profitable as AWS, but it doesn’t really have to be...
Skyfall7 profile picture
@kalu0003 and what happens when they make amazon spin off AWS? That 2.8% profit margin. I think Docu will be lot higher.
You miss-characterize AMZN. AMZN has its bread and butter in AWS. This has been their money making machine. They could do all sorts of experiments (burn money for that case) but they have a reliable and stable cash generating engine within the company (AWS). Now tell the world where is the cash generating engine in DOCU such that it can keep own spending with no profit in sight? What you are suggesting is an amateur view lacking deep understanding of the issues, by trying to use AMZN as a basis of your flawed logic. SA readers be aware of these amateur views. They will make you lose money. Just saying.. Thanks
Julian Lin profile picture
@kalu0003 AWS is profitable because they’re at the stage where it makes sense to let cash flow to the bottom line - meaning R&D isn’t growing as aggressively as before

DOCU is still growing its product suite... the fact that it is currently not profitable does not mean it won’t be profitable in the future.

We do both agree that it will never be as profitable as AWS, but it doesn’t really have to be...
@kalu0003 I only gave Amazon as an example because for years they had invested mostly in future growth over profits, and still do. AWS is at a much more mature stage as a company, they invest less in R&D and in new products. Docusign is at a much less mature stage, they're still developing new products, entering new markets and investing heavily in growth. The fact that the company isn't profitable today doesn't mean they won't be able to monetize their products in the future, as they lower investments in growth and in new products.
I admit last week really caught my Roth flat footed. Own a lot of high growth smaller cap tech in it that got bludgeoned pretty good! So now this weekend I am going through each one and re-assessing how big a believer I am in the company. My goal is to prune away 1/2 of them and hold steady with the other 1/2. I still am up a decent amount even after the blood shed, so I will try and take that as a silver lining. I have a feeling the pain isn't over for these high growth (but still unprofitable) companies, so I will use the money to nibble away at the 1/2 I have highest conviction on. DOCU is one of those, I won't be selling but adding. MELI is another one I won't be selling but adding.
Please don't link to your other articles if you ate going to keep them behind a paywall.
Julian Lin profile picture
@TIIIKI While I understand the desire for everything to be completely free to you, I note that there's a 2-week free trial available.

I think you'll want to stay for my best picks

Now that e-signature exists we are never going back! The only question is can DOCU also provide value added services and make a profit doing it? Thanks for the article, I am long DOCU. I’ll be looking at your best of breed as well.
Julian Lin profile picture
@67bmer Thank you for reading and commenting!
While you do highlight the opportunity in e-signatures (a market docusign currently dominates), I think you overlooked the opportunity and growth potential of their agreement cloud product suite. Not only does it significantly increase their tam, it allows them to expand the company to unsaturated and innovative markets. The agreement cloud allows them to automate the entire agreement process. As per their website "The Agreement Cloud eliminates paper, automates the process, and connects to the other systems you already use". I fully expect their agreement cloud to become the standard in agreements within the coming years. Long DOCU.
Skyfall7 profile picture
@tomergat1 but the cloud is costing a lot via AWS isnt it? so still won't show any profits for quite sometime.
@Skyfall7 For now, this is a company investing in growth and innovation. As long as they keep investing in r&d and in new products, I'm not as concerned with profits. Acquire customers, create loyalty, innovate with new products, expand to new markets, grow revenue, and only then monetize. In my experience that's how a company succeeds, I can wait for the profits to come flowing in, and I fully expect they will. If you need an example there is an easy one named after a south american river, I'm sure you've heard of it.
tom117 profile picture
Great article, long $DOCU! +1 follower!
Julian Lin profile picture
@tom117 Thank you for reading, commenting, and following!
Skyfall7 profile picture
Thankyou for this info. Great product, like you brought in late 2019 because changed way I do business. ( pre lockdown). Would love to top up. Sure results next week will show huge revenue growth. BUT with cloud support expansion , wonder will their operation costs escalate even further, and when will they show a profit. Need to crack international markets faster, so competitors don’t beat them to it.
Julian Lin profile picture
@Skyfall7 Hopefully there's a further selloff next week
Skyfall7 profile picture
@Julian Lin thinking the same, before results or after that is question?
Julian Lin profile picture
@Skyfall7 I won’t even hazard a guess
Started a position today, even after their 2020 blitz .. essentially for a reason above: People will want to continue signing digital docs. Lots of room for growth still.
Absolutelly holding and will look to add. The organic growth opportunity that stems from the signing function to the whole life cyle of a contract is enormous. Short article well written, nailed the key facts, thank you
Julian Lin profile picture
@Wadowedo Thank you for reading and commenting!
which one do you think will survive better post-pandemic: DOCU vs ZM? Thank you very much for your views and opinions? Thanks
@kalu0003 DOCU id say.
Julian Lin profile picture
@kalu0003 DOCU, but ZM's guidance suggests it shouldn't be overlooked either
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