If you've had to sign a document recently, you probably didn't use a pen and paper. You likely encountered the leading e-signature platform from DocuSign (NASDAQ:DOCU) to capture your agreement electronically. More and more companies are adopting e-signatures, and this software-as-a-service stock has more than doubled in the past year, trouncing the S&P 500's single-digit return.
Have investors missed the ride on this rocket? Let's look into its core growth opportunity and the new business that could double its addressable market, and we'll finish up by digging into the valuation to see if this stock is still a buy today.
The financials of an e-signature specialist
Starting at the top of the income statement, it's an amazing growth story with revenue almost quadrupling over the last four years. In its 2016 fiscal year ending Jan. 31, 2016, revenue came in at $250 million, compared with its most recent fiscal year haul of $974 million. Growth is still strong with last year's annual revenue gain at a healthy 39%, and with 94% of its sales attributable to subscriptions, it's got a stable base of incoming cash that investors love.
Cash from operations totaled $116 million for fiscal year 2020, which was a 12% increase from 2019. As of Jan. 31, 2020, its cash and equivalents hoard was $656 million. Because of its asset-light business, gross margins come in at a high 75% (up from 73% the prior year), which allows the company to make significant investments to grow the business. Last year, research and development costs made up 19% of revenue, and marketing and sales costs were a substantial 61% of sales. This drove the bottom line to a $208 million loss for the year, but the market is giving it a pass on profits for now since its opportunity is huge.
Growing the core business
DocuSign grew its customer base 24% in its most recent fiscal year to 589,000. That seems substantial, but management estimates it's only tapped 1% of the total number of customers in its target market. Only 13% of its customers have more than 10 employees, which creates another ripe opportunity, as these larger customers generate 88% of total revenue and are growing faster than average at 33% annually.
Government customers are another opportunity. It's already proven itself as a great partner with over 1,300 local, state, and federal agencies in all 50 states, but there's more to be had. It's earned a U.S. FedRAMP authorization for moderate level security, which allows its e-signature process to be used on 80% of all federal documents. It's also working to build a dedicated data center to qualify for the highest level security authorization that will come online in 2021.
Lastly, it is responding to the COVID-19 crisis by providing its software free to new customers for 90 days, offering virtual learning courses, and hosting a weekly webinar to make it easy to get started. The response has been tremendous. Its team is responding to what it calls a "staggering" number of "new patterns and use cases ... from organizations and governments."
As exciting as the e-signature business is, DocuSign's got another trick up its sleeve.
Doubling the opportunity
It was just over 18 months ago that it announced a $220 million acquisition of SpringCM, a lifecycle contract management platform. The company already had a significant relationship with this upstart, as 75% of its 600 customers were already integrated with the DocuSign platform. Even though SpringCM had a tiny fraction of the customers of its acquirer, this purchase would provide a huge opportunity for the e-signature specialist.
To understand how important this acquisition is, let's take a look at one of SpringCM's customers: Uber Eats. The food delivery service creates and manages tens of thousands of contracts with its restaurant partners. You would need an army of administrators to deal with generating, signing, and managing these contracts manually, but SpringCM's end-to-end contract lifecycle management software makes it much easier. Uber Eats isn't unique in the number of contracts it has, as most companies have contracts across numerous functions, and the management system probably looks like the one pictured below.
Management estimates this opportunity could double its addressable market, and the company is moving quickly to capitalize on it. SpringCM's software has already been integrated into the platform and has been rebranded as the DocuSign Contract Lifecycle Management (or CLM for short). This new integrated tool has been named a leader by Gartner, which gives it tons of credibility as the company looks to its ever-growing base of corporate customers as potential sales for this new valuable offering.
Buy this market leader
This e-signature market leader is just 17 years old with its best years yet to come. The stock sports a lofty price-to-sales ratio of 24, but this quality business is worth the price and is a buy today. With companies all over the globe rethinking how to transform their enterprises for the cloud-based, work-from-anywhere future, DocuSign has a world of opportunity ahead of it.