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DocuSign (NASDAQ:DOCU) deserves a much-needed update on a dated investment thesis, after my former take on the name dates back to September 2019, ahead of the pandemic and related to those trends induced by this situation.
At that time, I wondered where I could sign up for solid growth, with shares trading in the low $60s at the time. While shares have doubled ever since, the company has seen a very poor week of trading, for the right reasons after expectations have been quite high, far too high in my view.
The Former Thesis
When I looked at DocuSign over two years ago I concluded that the company was demonstrating on strong topline sales results, with no real leverage seen on the bottom line yet, which made me a bit cautious.
The market leader for ¨agreements¨ claims to remove paper as it is not just the environmental angle which benefits adoption of its solutions. Other benefits include easier storing of documentation, a quicker process, a reduction in errors and lower overall costs to (corporate) customers. The strong platform, technology and APIs with other applications, have been key in driving adoption of the software and technology.
At $60 per share the 175 million shares value the company at $10 billion, if we adjust for half a billion in net cash. This valuation should be seen in relation to $1.1 billion in annual billings, translating into a 9 times multiple while billings and sales grew at roughly 40%. That looked relatively compelling, as my concern was with the quarterly losses posted at $65 million at the time, although most of this resulted from stock-based compensation expenses, which limits a cash burn but does result in real some dilution to shareholders.
A Boom - And Now Bust
With shares trading at $135 per share, these same shares have doubled in just over two years, but investors will not feel the same way. Shares jumped in the year 2020 amidst the outbreak of the pandemic which clearly provided a huge tailwind and as recent as September of this year shares hit a high in the low $300s. However, investors have a very tough pill to swallow with shares trading down 40% at the moment of writing on the back of the quarterly results.
Early in 2020 the company announced a $188 million bolt-on deal for Seal Software, truly a bolt-on transaction, followed by a solid fourth quarter earnings reported in which revenues rose 38% and billings were up 40%. The company guided for 2020 sales at $1.27 billion, up roughly 30% from the $974 million reported in 2019.
In June, the company posted a 39% increase in first quarter sales, yet billings rose 59% on the back of the pandemic and work-from-home policies as this unleashed the stock. Second quarter sales were up 45% as billings rose 61%. Third quarter sales growth accelerated further to 53%, with billings growth advancing to 63%. Fourth quarter sales growth rose further to 57% as billings growth decelerated a bit to 46% with the pandemic appearing to be a bit on its retreat. Revenues of $1.5 billion for the year came in far ahead of the original guidance. The company reported a net loss of $243 million, in part because of $287 million in stock-based compensation expense, as the company was economically still reporting losses, yet it was cash flow positive with losses mostly resulting in dilution to investors. At that point in time, the company guided for nearly $2 billion in revenues in 2021.
First quarter sales in 2021 (that is the fiscal year of 2022) rose 58%, with billings up 54%. Second quarter sales rose 50% and billings growth came in at 47% as the company kept raising the full year guidance, now seeing sales at $2.08 billion and billings at $2.42 billion. The bombshell was reported in the third quarter, and while sales were up 42%, billings growth slowed down to just 28%, the slowest pace in quite a long time. That being said, the comparables are the toughest, as the third quarter growth in 2020 marked the quickest pace of revenue and billing growth of all quarters last year. The company actually maintained the full year sales outlook, with sales still seen at $2.08 billion, albeit that the full year billings outlook was cut to $2.34 billion.
What Now?
In response to the slower pace of growth, shares have fallen to $135 at the moment of writing. With 197 million shares outstanding, the company is awarded a $26.6 billion equity valuation. This is roughly equal to the enterprise value, amidst a modest net cash position. With sales trending at $2.1 billion here, the valuation comes in around 12-13 times sales, while growth has slowed down quite a bit.
So if we compare this to 2019, expectations have risen a bit, as the valuation comes in closer to 11 times bookings for this year. On the negative side, growth appears to be slowing down quite a bit. On the positive side are the developments on the margin front. Third quarter GAAP operating losses narrowed to just $3 million, which marks dramatic improvements from the year before, and adjusted for amortization expenses, the company is minimally profitable, essentially breaking even.
Right now I find myself performing a balancing act. While the CEO claims that the growth slowdown is self-inflected, and the valuation has been reset in a major way, I am not automatically seeing appeal. Trading at $300 recently, shares traded at valuations in the mid-twenties and now the valuation has been reset to around 11 times billings, which is still higher than the sales multiple in September 2019, not a shabby time for the tech market either.
On the bright side is that the losses have not come to a halt and small profits are on the verge of breaking through, yet growth has slowed down quite a bit, which is a bit concerning in relation to the sales multiple.
Nonetheless, I see appeal having increased a great deal at this point, and while I've certainly become more attracted to the shares here, I am not yet buying this dip, although I am close to buying some shares on further dips. The pandemic has clearly demonstrated that the business model is here to stay, as the question is how much growth is still seen. But, moreover, how much has the pandemic pulled demand growth forward over the past year?
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