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3 Reasons DocuSign Is a Buy

By Aditya Raghunath - Jan 23, 2020 at 8:43AM

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As a high-growth, enterprise-facing company, this stock should be on the radar of long-term growth investors.

Shares of DocuSign (DOCU -8.36%) crushed the broader market in 2019. The stock gained 85% last year, nearly tripling the return of the S&P 500 and setting it apart as a winner among growth stocks.

The company went public in April 2018 at $29 per share, and the stock has returned a phenomenal 150% in less than two years. But as we know, historical returns matter little as the stock market is forward looking.

The most important questions for investors is: Can DocuSign continue to outperform the market and its peers long term? And will it create significant investor wealth? Well, I am optimistic about the company's prospects, and here's why.

Expanding customer base

DocuSign is a major player in the e-signature space. The company automates manual and paper-based processes and manages several aspects of the documented business transaction process.

In its fiscal third quarter of 2020 (ended in October), DocuSign continued to acquire customers and develop new solutions to expand its product portfolio. The company now boasts a paying customer base of 562,000, up 24% year over year.

A laptop displaying a long-term growth chart.

Image source: Getty Images.

The company also experienced strong demand for the DocuSign Agreement Cloud, which helped drive 40% year-over-year revenue growth for the company during the quarter. 

The DocuSign Agreement Cloud is used by enterprises to generate and negotiate agreements between two parties. It automates several processes such as the generation, negotiation, and approval of contracts. Enterprises are increasingly shifting toward automation, as it accelerates the deal-making process.

According to the DocuSign, 82% of agreements are completed in less than a day using its tools and services, and 49% of agreements are completed within just 15 minutes.

Huge market opportunity

DocuSign is part of a high-growth opportunity that is rapidly expanding. It has estimated the total available market in the e-signature segment at $25 billion and believes market penetration currently sits at just 5%.

During the company's earnings call, CEO Dan Springer noted, "We also showed how that TAM [total addressable market] could potentially double with the expanded opportunity for the rest of the Agreement Cloud. Over the past 18 months we've taken several steps to deliver on that vision."

So how is DocuSign gaining traction in this high-growth segment? In Sept. 2018, the company acquired SpringCM to integrate the latter's technology into its product line and operations.

SpringCM is a cloud-based document generation and contract lifecycle management software company. DocuSign expects this acquisition to accelerate enterprises' ability to digitize their systems of agreements process.

In terms of product development, DocuSign has built several new agreement cloud solutions, which Springer described as "[...] our suite of more than a dozen products now and over 350 prebuilt integrations that help organizations connect and automate their agreement processes."

Several clients have expanded their e-signature usage over the years. According to DocuSign, one large U.S.-based credit union increased its e-signature usage by 300% in 2019.

DocuSign is posting an adjusted profit

It's common for high-growth companies to struggle with profitability, but DocuSign is already reporting an adjusted net profit. Gross margin came in at 79% during the third quarter, and adjusted net income of $20.9 million marked a major improvement from the prior-year's roughly break-even result.

Analyst consensus estimates have earnings growth in fiscal 2021 coming in at 75%. Even combined with its significant top-line growth and expanding customer base, the forward price-to-earnings multiple of over 200x is quite high. On a price-to-sales basis, the company still commands a premium multiple of 14.5x.

However, DocuSign is expected grow revenue at a healthy, double-digit rate over the next several years. This will result in rising profit margins, and the company generates 95% of its top line from subscription products, which offer a stable stream of recurring revenue. 

Given its growing customer base, robust revenue growth, and expanding margins, Docusign is a solid bet for investors who can stomach some volatility and want to add a high-growth stock to their portfolio.

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