DocuSign (NASDAQ:DOCU) shares were already driving in the fast lane, having gained nearly 85% in 2019. The stock has been pedal to the metal in 2020, as the COVID-19 pandemic and remote work increased the need to digitally sign documents and manage agreements, driving shares up 190% and making it among the best performers so far this year.
Its performance has left many investors wondering: Is it simply too late to climb aboard, having missed its recent run-up, or does DocuSign have more gas left in the tank?
Digital signatures and much more
With the rise of the pandemic, the need to consummate transactions at a distance has never been greater. DocuSign has long been the leader in the e-signature market, with an impressive pedigree to match. The company boasts hundreds of millions of users, with more than 660,000 paying customers. DocuSign also counts 18 of the top 20 global pharmaceutical companies, 10 of the top 15 global financial companies, and seven of the top 10 global technology companies among its customers. As a result, DocuSign controls an estimated 70% of the e-signature market.
That's not to say the company lacks competition, as a number of high-profile competitors have popped up in recent years. DocuSign competes with pioneers like Adobe's Adobe Sign, as well as newer entrants like Dropbox's HelloSign, among others, each wanting to carve out a piece of the market for themselves.
It's important to note that the opportunity for DocuSign is no longer just about facilitating electronic signatures. In early 2019, the company launched the DocuSign Agreement Cloud, a suite of applications and integrations designed to help organizations automate the entire agreement life cycle, including preparing, signing, acting upon, and managing those agreements. Some examples include preparing and managing offer letters to job candidates, managing the process of sales contracts between buyer and seller, and much more.
During the first-quarter conference call, CEO Dan Springer pointed out that digital signatures mark the beginning of a long-term relationship with customers. "Typically, e-signature is the first step that many customers take on their broader digital transformation journey with us," Springer said. "So from a financial point of view, we believe this surge in e-signature adoption bodes well for future agreement cloud expansion."
Impressive quarterly results
That surge in digital signatures also helped generate robust results in the first quarter. Revenue of $297 million grew 39% year over year, edging higher from 38% gains in Q4. This boosted the bottom line even more, as non-GAAP (adjusted) earnings per share (EPS) of $0.12 soared 71% year over year. At the same time, billings -- which includes sales that have been contracted but not yet included in revenue -- increased 59% year over year to $342 million.
Underlying customer growth was equally impressive. DocuSign added 10,000 net new direct customers and 58,000 self-service customers, bringing the total to nearly 661,000. More important for the company's future performance, clients with annual contract values of greater than $300,000 grew 46% year over year to 473, while enterprise and commercial customers rose 49%. DocuSign's expanding relationships with its customers was evident in its dollar-based net retention rate -- which measures the increased spending by existing clients -- of 119%.
Due in part to its meteoric rise since early last year, DocuSign's stock is by no means cheap. In fact, it's quite the opposite, currently selling at 30 times forward sales, when some value investors see a more reasonable price-to-sales ratio being generally between 1 and 2. This shows that investors clearly have high expectations baked into DocuSign's current share price.
To put that into perspective, analysts are expecting sales growth of 35% in the current quarter, 35% for the current year, and 28% next year -- though DocuSign has exceeded both analysts' and management's expectations on a fairly regular basis. Given this historical backdrop, the results will likely be better.
The bottom line
Which brings us back to the quintessential investing question: Is DocuSign stock a buy? The answer depends very much on the preferences of the individual investor.
Those with an eye toward value will no doubt find DocuSign too expensive, even in light of the company's impressive top- and bottom-line growth.
However, for those investors with a long-term investing time horizon and the ability to stomach frothy valuations, I would argue it's not too late to put some of your cash to work in DocuSign.
The company generated revenue of about $974 million last year, which pales in comparison to the total addressable e-signature market, which management estimates at about $25 billion. Additionally, the it believes that the Agreement Cloud could potentially double its total addressable market to $50 billion. This illustrates the long runway ahead and why DocuSign stock is a buy.