DocuSign's (DOCU 1.31%) e-signature product has seen unprecedented adoption as businesses scrambled to operate in a remote-only work environment due to the pandemic. Over the past 12 months, the company has added hundreds of thousands of customers and grown its top line over 50%.
But the stock has done even better, seizing a 170% gain for shareholders over the past year. Has the stock gotten ahead of itself, or is this an opportunity to buy a winner on its way up?
The business of an e-signature platform
DocuSign's flagship product enables users to record a signature on digital documents easily and securely. It offers individual e-signature plans starting at $10 per month up to enterprise-level packages for large companies. The company has over 800,000 customers, but a smaller number -- 113,000 -- are enterprise and commercial customers which make up 87% of the revenue. A solid 96% of the company's top line comes from subscription fees, so it has a reliable and predictable revenue stream.
In recent years, the platform has expanded beyond its original solution to offer its Agreement Cloud suite of products. This set of tools enables companies to manage the end-to-end agreement process digitally, from initial drafts to executing the contract and managing it after signing. The Agreement Cloud suite also allows companies to use its powerful artificial intelligence engine to examine contracts to identify issues, assess risk, or build smart purpose-built contracts from scratch.
These contract lifecycle management and AI tools add another $25 billion in the addressable market to the original $25 billion opportunity for e-signatures. This additional opportunity is exciting for the long-term prospects of the company, but Docusign hasn't provided details on how much revenue this part of the business is generating. In the latest earnings call, CEO Daniel Springer said "it's going to be a while before [...] the non-signature part of our business will be meaningful enough to sort of warrant that kind of breakout." But even if it will be some time before the non-signature segment will be material to top- and bottom-line results, the company has plenty of ways to grow its e-signature revenue as well.
Image source: DocuSign.
Growing its digital signature business
What most investors don't know about DocuSign is that it benefits as enterprise and commercial customers increase their usage of its e-signatures. As a new corporate customer signs on with an e-signature package, the pricing is set based on estimated usage of "envelopes." Think of an envelope as one signature page on a document set up for one or more people to sign. As the company increasingly employs digital signatures, the service catches on and employees often find new use cases or expand e-signatures into new departments. As the customer uses up their allotted envelopes, a sales rep will approach the customer's decision-makers to update the contract to account for the new activity.
In addition to "regular" digital signatures, DocuSign can be integrated into existing corporate workflows. The platform has more than 350 built-in integrations to tools like Slack, Workday, SAP, and Salesforce. These integrations are very sticky and can ensure that a customer's e-signature volume remains high.
Additionally, the company is close to being approved for the FedRAMP "high impact" level which will allow its e-signature product to be used to sign the "government's most sensitive, unclassified documents." This opens up digital signature services to customers like the Department of Defense, Veterans Affairs, and Homeland Security.
Management also estimates it has captured fewer than 2% of the estimated businesses around the world in its core markets as customers, giving its e-signature business a long runway of growth.
Need more reasons to buy?
The long-term growth opportunity isn't the only thing investors like about this software-as-a-service company. Docusign has solid and stable gross margins in the mid-70% range and is improving its cost structure as it grows. The loss from operations over the first nine months fiscal 2021 decreased to 14.6% of revenue, down from 21.6% a year ago. And the company has nearly $599 million in cash and equivalents it can use to fund its growth for years to come.
Lastly, its Glassdoor ratings (anonymous reviews from current and former employees) are stellar with 93% recommending Docusign as a place to work to their friends and 97% approving of the job the CEO is doing. As a result, the company received a 2021 "Best places to work" award from the website.
The bottom line for investors
Is DocuSign a buy? Yes. But not only is it a buy, I think it's relatively cheap compared to some of its software-as-a-service peers, and the share price has even declined 15% from its year-to-date high as of this writing. DocuSign carries a hefty price-to-sales ratio of 33, but that is not unexpected in this market for a company with accelerating revenue growth that topped 53% in the fiscal third quarter.
This e-signature platform is investing heavily to maintain its lead and expand its platform. Growth investors would do well to buy now with a mindset to hold for the long term. I'm sure your future self will thank you.
