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DocuSign Is the Amazon of the Legal Profession

By Brent Nyitray, CFA – Jul 1, 2020 at 12:00PM

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It's working in an industry ripe for disruption.

When Amazon.com emerged on the scene in the late 1990s, it completely disrupted the business of retailing. Amazon ushered in the use of technology and a sea change in delivery, and drove down prices. DocuSign (DOCU -1.70%) is in the beginning stages of doing this to the field of law. While the company is most known for its electronic signatures, the whole concept of DocuSign's Agreement Cloud is finally automating much of the legal duties of a company. 

Digital Signature

Image source: Getty Images.

Seal Software and the automation of law

DocuSign took the concept of its Agreement Cloud even further and recently bought a company called Seal Software, which uses artificial intelligence (AI) to analyze and review legal documents at a pace that exceeds an army of associates. On the company's fourth-quarter earnings conference call, DocuSign CEO Dan Springer gave an example of Seal's potential:

To give you a little more color, let me share a few customer examples. One large international information services company reduced the time they spent on legal reviews by 75%. And a global financial services company automated the analysis of more than 2.5 million contractual data points across its supplier agreement. And an aviation company was able to review more than 25,000 agreements in just a few business days, something that could have taken months if done in the traditional manual fashion.

A massive productivity increase, while identifying risks that might have been missed

As anyone who has retained legal counsel knows, time is money, and a 75% reduction in time spent on legal reviews (i.e., billable hours) is a considerable saving. The Agreement Cloud already gives DocuSign a foothold in managing a company's legal infrastructure. Seal Software's AI is useful in mergers and acquisitions, helping identify contingent liabilities or risks that can be easy to miss. Company policies and procedures can be updated with the latest regulatory guidance almost immediately, while vendor management can help reduce unnecessary spending and identify potential risks in a contract.

DocuSign can do to law what Amazon did to retail 

While most industries have seen technology drive down costs and add value, law has been somewhat late to the party. Unlike most industries and professions, it has been insulated from overseas competition.  DocuSign's Agreement Cloud and the use of AI to analyze legal documents have the potential to do to law what Amazon did to retail: disrupt an industry with price discovery, efficiency, and productivity savings. While DocuSign doesn't spell the end of the big law firm, it will certainly allow corporate legal departments to shrink staff size and save money on billable hours. 

Seal Software is poised to be a key to DocuSign's growth, but it is largely a 2021 story and will have only a modest impact on 2020 earnings. DocuSign has been viewed as a COVID-19 stock, given that social distancing has increased the need for digital signatures. The stock was recently added to the Nasdaq 100 stock index, and has been a stellar performer this year, rising by 150% since mid-March.

The COVID-19 crisis proved the need for digital signatures and has accelerated the stock's growth. DocuSign is by no means cheap, trading at over 350 times estimated 2020 earnings per share. That said, Amazon was never cheap, either. Sometimes for a disruptive growth stock, you have to pay up. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brent Nyitray, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and DocuSign and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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