DocuSign (DOCU -0.07%) is the undisputed leader in the e-signature space, but the company is rapidly expanding its capabilities to capture share in a much larger market. Recent acquisitions and product developments are enabling DocuSign to provide a full contract management suite to customers, potentially doubling the company's addressable market.
DocuSign's current economic moat is narrow, but its switching costs are high enough to play a major role in protecting its roughly 70% market share over competitors like Adobe (ADBE -1.49%). With DocuSign's Agreement Cloud gaining traction, the company's competitive edge will only get sharper.
Fast-tracked digital adoption
Before anyone had even heard of COVID-19, DocuSign was already leading the charge in the e-signature space. Now that a world without digital contract management is unimaginable, DocuSign is poised to retain its market share. Like most software companies, DocuSign's customers face high switching costs if they choose to take their business to a competitor -- or revert to legacy pen-and-paper solutions.
For DocuSign's FY2021 (ending January 31, 2021), revenue increased 49% year over year to $1.5 billion, and net dollar retention reached its current peak of 123%. Net dollar retention is an important performance indicator for software companies, gauging whether existing customers are spending more money on DocuSign's services.
DocuSign's net dollar retention has increased steadily for the past five fiscal quarters and will likely continue to rise, with its additional features and increased focus on well-financed commercial and enterprise customers increasing average revenue per user.
The AI-powered future of contract management
DocuSign's Agreement Cloud is the perfect long-term solution for contract management in the increasingly digital post-COVID workplace -- it's safe to say we're not going back to signing all our contracts on paper anytime soon.
Strategic acquisitions like LiveOak Technologies (video collaboration and remote notary services), SpringCM (streamlined contract lifecycle management), and Seal Software (AI) further enhance the Agreement Cloud and allow DocuSign to charge more per customer by providing more value through unique services. Integrations with over 350 existing software applications like Salesforce and SAP make the decision to convert or upgrade to the Agreement Cloud that much easier.
That said, AI is the real differentiator here. DocuSign's AI can break contracts down into clauses, analyze them, and give scored risk assessments that can save customers money on legal review and lost labor hours. Adobe's AI is far less sophisticated, with use cases like form field recognition, auto-cleaning of scanned documents, and recognition of document images from a computer's photo library.
Adobe's basic capabilities might save customers time when they're finding, uploading, or formatting information. But they cannot replace or even supplement important, expensive legal and risk analysis like DocuSign's AI can.
This sophisticated analysis that DocuSign's AI-powered Agreement Cloud can provide -- especially for larger commercial and enterprise customers with large quantities of long, complex contracts to review -- is absolutely critical for DocuSign's growth. According to two independent studies sponsored by DocuSign, a third of companies said contracts take on average over 30 hours to negotiate, and 65% of companies experienced delays in closing deals as a result of contract management challenges.
DocuSign's AI has already proven that it can resolve these issues for customers. According to a DocuSign press release, two large international companies that have adopted its AI have reported a more than 75% reduction in hours spent on legal review of customer and supplier agreements.
Unless Adobe can somehow quickly surpass DocuSign in AI capabilities, DocuSign has locked in its spot as the frontrunner in the $50 billion full-cycle contract management market. With its already strong base of 500,000+ paying customers -- including 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 -- DocuSign is positioned to increase net dollar retention in its existing base and attract new customers with cutting-edge AI applications.
While the company will likely not reach GAAP profitability for several years, it has a healthy balance sheet with positive free cash flow, GAAP operating losses shrinking modestly year over year, and a manageable amount of convertible debt for its cash balance (with maturity in 2023).
Unlike many early stage, high-growth companies, DocuSign has reported adjusted profitability since 2019. DocuSign is worthy of its relatively steep price-to-sales ratio of 27, considering the company's rapid growth, market share, and unique, cutting-edge technology. Still, keep an eye out for any price drops that provide a good window to buy the stock, whether before or after the June 3 earnings report.