E-signature specialist DocuSign (DOCU 0.69%) recently went public on April 26, and the market loved what it saw. Underwriters priced its initial public offering at $29 per share, but the stock quickly skyrocketed 38% on its first day of trading, and now sits at a lofty $45 per share as of this writing.
What's got Wall Street so excited? Well, DocuSign operates a pretty great business – founded in 2003, it's currently the number one e-signature vendor globally. In addition, DocuSign has a sticky subscription business model, and subscription models are all the rage these days.
The e-signature is a digital alternative to signing agreements with a pen and paper. One may have thought that such an antiquated process would have been digitally disrupted years ago, but the fact is, many businesses are reluctant to change these processes due to the high importance of legal commitments in the corporate world, from employee agreements to sales contracts and beyond. But that's beginning to change.
The large and growing opportunity clearly has Wall Street excited, but is DocuSign a buy at these levels?
Docusign is an impressive IPO. Image source: Gettiy Images.
Taking flight
As I mentioned, the digital signature was slow to take hold in corporate America, but DocuSign's business began to take off in a material way around 2012-2013, when the company pivoted from selling to small and commercial businesses to larger enterprises. Since 2013, the company has increased its customers with over $300,000 in annual contract revenue from 30 to 200.
At the end of its fiscal year ended in January, the company had 370,000 customers, running the gamut from huge global enterprises to sole proprietorships, up 30% from 285,000 a year ago. High-revenue enterprise and commercial customers grew 25% from 30,000 to 40,000 over that time. In addition, the company has been able to expand its usage within existing customers rather well, with the dollar-based retention rate of 115% each of the last two years, which means the same customer spent 15% more on average than it did last year.
This has led to impressive growth over the past few years. Since many young, high-growth software companies are not yet profitable on a GAAP accounting basis, many tech analysts look to other telling metrics, including revenue, billings, adjusted EBITDA, gross margins, and free cash flow. DocuSign impresses on all of these counts.
|
DocuSign Fiscal Year (millions) |
2016 |
2017 |
2018 |
|---|---|---|---|
|
Revenue |
$250.5 |
$381.5 |
$518.5 |
|
Growth% |
|
52.2% |
35.9% |
|
Billings |
$289.5 |
$432.4 |
$599.1 |
|
Growth % |
|
49.3% |
38.6% |
|
Gross Margin |
70% |
73% |
77% |
|
Adjusted EBITDA |
($69.4) |
($51.9) |
$9.8 |
|
Free Cash Flow |
(96.3) |
(48.1) |
36.1 |
Source: DocuSign S-1. Table by author.
These numbers are pretty impressive, especially on profitability, as many tech companies hitting the market are not yet generating positive EBITDA or cash flow. But can the good times continue?
DocuSign's market
I think so. According to the company's registration documents, DocuSign believes it's operating in a total addressable market of about $25 billion, nearly 50 times higher than the company's current revenue. As I mentioned, the switch to e-signatures is still somewhat early, and DocuSign has also been getting traction recently in international markets, with 17% of revenues coming outside the U.S. in the last fiscal year.
DocuSign doesn't mention too much in the way of competition, aside from Adobe (ADBE 1.52%), which acquired EchoSign back in 2011. Outside of that, DocuSign only mentions smaller niche vendors focused on specific industries. So, with only one large competitor, the competitive landscape looks doable for DocuSign.
How high to buy?
DocuSign currently trades around 11 times sales, which is, no doubt, expensive; however, when compared with other recent tech IPOs from the past year, the price seems downright reasonable. Big data specialist Cloudera (CLDR +0.00%) trades at 6.3 times sales, database software company MongoDB (MDB +4.87%) trades at 13.5 times sales, and identity-as-a-service company Okta (OKTA +0.46%) trades at whopping 19.8 times sales.
Looking to sign off
I'm always hesitant to buy a company immediately after a post-IPO surge due to the dynamics around IPOs and lockup periods (insiders and underwriters are prevented from selling for a period of six months). That being said, Docusign looks like a promising bet at this moment. Riding the long-term digitization of the enterprise and with limited competition, DocuSign may very well be worth paying up for, even at these levels.
