Investment Thesis
DocuSign (NASDAQ:DOCU) continues to perform in top shape. Meanwhile, investors' sentiment has become fully detached from underlying fundamentals. DocuSign is a rapidly growing business, and the post-COVID world won't change that.
Over time, DocuSign will go from a nice-to-have platform to a can't-live-without eSignature product -- the only question is how long it will take.
Also, as you'll see here, DocuSign is much more than just a lockdown winner: it's a strong company that's likely to grow its revenues at somewhere around 30% to 35% in 2021. Meanwhile, investors are now only being asked to pay 20x forward sales even though DocuSign is already generating solid free cash flow margins of 10%.
This investment is worthwhile considering. Here's why:
Revenue Growth Rates Discussed & Market Sentiment
DocuSign was one of the beneficiaries of the ''lockdown trade''. Back in early 2020, many investors crowded around the same few winners. There was a rapid movement to participate in this company's growth prospects, and back in September 2020, I too become a DocuSign shareholder (I subsequently sold for unrelated reasons).
Thus, having no skin in the game but having been a shareholder, I believe I'm best positioned to layout an unbiased discussion and make the case that its stock performance of late is nothing more than Mr. Market's whim.
Source: author's work
What's running through most investors' minds right now is that DocuSign has already put up its best performance, and that going forward, it will be up against difficult comps in 2021.
Yet, I categorically disagree with this assessment. I do allow for the fact that 2021 will obviously have really difficult comps with 2020, but this is thinking the investment through in too much of a one-dimensional plane.
Ultimately, there's an unquestionable digital transformation taking place. There's no office that has adopted DocuSign and all its convenience and incorporated it into their running costs that are now thinking of shedding the platform and returning to pen and paper.
What's in actuality more likely to take place is that many businesses have been very slow to embrace the digital transformation and that they will be looking to get on board.
That's doesn't entirely factor in the fact that DocuSign will have difficult comps in 2021 -- that's a reality, of course. However, DocuSign's share price is no longer one of undoubting either. If anything, right now, investors have too much doubt and not enough ''belief''.
The Underlying Business Continues to Improve
The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn't changed.
Peter Lynch
Source: DocuSign Website
During DocuSign's Q4 2021 earnings call, we can expect to hear more about the way that digital signatures are a way to automate and connect the agreement process in a seamless manner.
We can else expect to hear from DocuSign how the team is broadening its platform's reach beyond just real estate and financial services and into new verticals.
Ultimately, the eSignatures process is here to stay. There's no question that customers crave the convenience of an eSignature process. The only question that's still unanswered is just how much success will DocuSign have in being seen as a critical package that needs to be taken up by enterprises and SMBs alongside cloud storage, Enterprise Resource Planning (''ERP''), and Customer Relationship Management (''CRM'') platforms, as a way to increase employee productivity and sales.
Having said that, despite the uncertainty over its near-term outlook, I believe that stock right now trades with a reasonable margin of safety.
Valuation -- Reasons to Remain Bullish
Let's make some back-of-the-envelope calculations. Let's assume that in 2021, DocuSign's growth rates slow down so that it grows at somewhere between 30% and 35% y/y. This implies that its revenues would come in around $1.9 billion for fiscal 2022 (ends in Jan. 2022).
Consequently, right now, the stock is trading at approximately 20x forward sales. This may not appear to be hugely enticing. Having said that, compared with a myriad of other SaaS stocks, DocuSign is surprisingly free cash flow generative. In fact, for every dollar of revenue in Q3 2021, approximately 10 cents drop its bottom line as clean free cash flow.
At this junction, most investors note that this is because of the heavy stock-based comp that's added back as a non-cash expense. To that, I note that this is clearly already factored into its market cap as the diluted number of shares increases and gets factored into its market cap.
The Bottom Line
In sum, investors are being asked to pay 20x forward sales for a strong free cash flow generating company that is most likely growing at somewhere between 30% to 35% y/y in 2021.
What's more, we know that DocuSign's CEO, Dan Springer, and his team own approximately 5% of the company, thereby making them positively incentivized to drive forward shareholder value.
DocuSign will report its Q4 2021 results this Thursday, after hours. Stay tuned.
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