Only six months after its initial public offering, shares of DocuSign (NASDAQ:DOCU) have soared more than 50% from its IPO price of $29. Excitement surrounding the e-signature and digital document management company's growth prospects is fueling investor demand for its stock.
Better still, many more gains may lie ahead. Here's why.
A large and still mostly untapped market opportunity
DocuSign is the world's leading e-signature company. It's also a leader in digital transaction management -- a booming field that's helping businesses convert their paper-based processes to digital methods. While the promise of a paperless world has been around for years, there's still much work to be done before this can come to fruition. Therein lies DocuSign's opportunity.
The global market for digital transaction management (DTM) is projected to reach $30 billion by 2020, according to Aragon Research. Thus, the $685.5 million in revenue that DocuSign expects to generate in the year ahead represents only about 2% of its total addressable market. As such, DocuSign has an opportunity for exponential growth.
The market is growing because e-signature and digital document services such as what DocuSign offer are more efficient and secure than paper-based processes. They can also produce substantial savings for the businesses that adopt them. In fact, Aragon Research CEO Jim Lundy estimates that savings can be as high as $100 per document and that "return on investment from DTM will reach tens of millions of dollars annually for the largest organizations."
Perhaps unsurprisingly, Aragon believes it's a forgone conclusion that more corporations will eventually adopt DTM technology. "Digital transaction management is so powerful for driving business benefits that this isn't a matter of whether enterprises will embrace it, but when," Lundy said.
A powerful brand
As the leading provider of e-signature services, DocuSign stands to benefit from this growing demand for DTM services perhaps more than any other business. The company's name has become synonymous with e-signatures. Sophisticated investors know just how powerful an advantage this can be. As an example, once people began referring to the action of performing an internet search as "googling," it became nearly impossible for Google's competitors to claw back market share.
Moreover, DocuSign's leadership in e-signatures gives it a route into the far broader area of digital document management. Starting at $120 per year, DocuSign's e-sig offerings are affordable for small businesses, yet they can be scaled up to enterprise-level services suitable for even the largest of corporations. DocuSign's steadily expanding software suite now includes an automated agreement preparation platform utilized by the likes of Salesforce and T-Mobile, as well as specialized industry-focused solutions such as digital mortgage closing services.
With its trusted brand and market leadership, DocuSign should have a leg up on its competitors when it comes to acquiring new customers and cross-selling to businesses of all sizes.
Cross-selling should allow DocuSign to increase its revenue per user and expand its profit margins. We're already seeing evidence of this: non-GAAP gross margin expanded to 81% in the second quarter, up from 79% in the year-ago period and 73% back in fiscal 2016. This helped DocuSign's non-GAAP net income improve to $5.2 million, compared to a loss of $1.2 million in the prior-year quarter. With its sales growing rapidly -- Q2 revenue surged 33% -- DocuSign's profitability metrics should continue to strengthen in the years ahead.
Still, at 11 times sales, DocuSign's stock is priced at a premium. An investment in the company today assumes that it will continue to gain share in the DTM market and grow briskly for many years. Fortunately, DocuSign appears poised to do just that. And if it's able to deliver on its immense potential, the gains DocuSign's stock has produced for investors to date could pale in comparison to its future returns.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Salesforce.com. The Motley Fool recommends DocuSign and T-Mobile US. The Motley Fool has a disclosure policy.