DocuSign (NASDAQ:DOCU) was one of the undisputed winners of 2019, with its shares jumping 85%. The stock has continued its stratospheric rise in 2020, as the pivot to remote work caused by the pandemic drove ever-increasing demand for digitally signed documents and agreement management, making it one of the year's top performers.
However, with not one, but two effective coronavirus vaccines on the fast track for approval, DocuSign is one of a number of high-flying stocks that have dipped, losing more than 20% of its value in less than two months. This has many investors wondering if this is a buying opportunity or if there's more carnage to come.
Expanding its digital handshake
One of the side effects of the pandemic has been the growing realization that business can still be conducted at a distance, with digital signatures paving the way. DocuSign has dominated this nascent industry, with an estimated 70% of the e-signature market.
That's not all. The company is the top choice across a broad spectrum of industries, boasting 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 current customer base. Even more impressive, DocuSign has hundreds of millions of users and more than 749,000 paying customers.
The company's unbridled success has attracted all manner of competitors, from household names to start-ups. This includes Adobe's Adobe Sign, as well as more recent rivals like Dropbox's HelloSign, among others.
However, as successful as it has become in the e-signature market, that's just the jumping-off point of DocuSign's future success. Early last year, the company debuted the DocuSign Agreement Cloud, a suite of applications and integrations designed to help organizations automate the entire agreement process -- an area that has long been ripe for disruption. This includes things like document generation, identity verification, and click-to-agree solutions. It also monitors the preparing, signing, acting upon, and managing of those agreements.
DocuSign has a land-and-expand model that begins with digital signatures, but as CEO Dan Springer pointed out earlier this year, that's just the start of its journey with customers.
"Typically, eSignature 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 eSignature adoption bodes well for future agreement cloud expansion."
Turning signatures into dollar signs
The increasing need for digital signatures and the continued expansion of relationships with customers was evident in DocuSign's second-quarter results. Revenue of $342 million grew 45% year over year, accelerating from 39% gains in the first quarter. It boosted the bottom line even more, as non-GAAP (adjusted) earnings per share (EPS) of $0.17 grew 17-fold year over year. At the same time, billings -- which includes sales that have been contracted but not yet included in revenue -- climbed to $406 million, an increase of 61%.
The impressive financial results were driven by equally impressive customer gains. DocuSign added 88,000 new customers, bringing the total to 749,000. More important for the company's future performance, customers with annual contract values of greater than $300,000 grew 41% year over year to a total of 520, while enterprise and commercial customers grew 55% to 99,000. DocuSign's expanding relationships with its clients were evident in its dollar-based net retention rate -- the increased spending by existing customers -- which hit a record this quarter of 120%.
Due in part to its gains so far this year, DocuSign's stock is by no means cheap, though it's much cheaper on a relative basis than it was just weeks ago. It's currently selling at 33 times sales (down from well over 40), when a reasonable price-to-sales ratio is generally between one and two. This shows that there are still high expectations baked into DocuSign's current share price.
To give this a little context, analysts are expecting sales growth of 45% in the current quarter, 42% for the current year, and 31% next year -- though DocuSign has a history of exceeding both analysts' and management's expectations. Given this penchant for conservative estimates, the results could well be higher.
Vaccine or not...
DocuSign obviously has plenty going for it, but the biggest question mark hanging over the stock right now is whether the super-sized gains brought on by the pandemic will evaporate given the fact that there's the potential for a successful coronavirus vaccine on the horizon.
While a vaccine could certainly help things return to some semblance of "normal," it will still be well into next year before it would be widely distributed, so I view the rotation out of "coronavirus winners" to be a bit premature.
It's also important to remember that the adoption of digital signatures was well under way, even before the pandemic reared its ugly head. While it may have gotten a temporary boost from remote work, over the longer term, e-signatures and the Agreement Cloud are simply a matter of convenience. Why would someone trudge halfway across town -- or worse, across the country -- when an agreement can be consummated with a few clicks of a mouse?
The market for e-signatures isn't going away, and the expansion into agreement and contract management will further entrench DocuSign's large and growing client base and provide ample growth opportunities for years to come.