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1 Tech Stock Positioned to Perform Well During Inflation

By Brian Withers - Jul 2, 2021 at 6:34AM

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Once you get used to this technology, there's no going back.

The coronavirus was a big boost to Docusign's (DOCU 2.77%) e-signature platform as businesses scrambled to continue operating in a remote environment. As the pandemic slowly becomes something in our rearview mirror, inflation has crept up above 3% for the first time in over a decade. On this Motley Fool Live episode recorded on June 17, Motley Fool contributor Brian Withers discusses why shareholders in this digital signature business can rest easy regardless of the economic environment. 

Brian Withers: One of, I guess the tailwinds in the coronavirus, was everybody went to work remotely. One of the stocks that's really benefited from that is DocuSign. Well, I have a couple of charts to share here.

One of the key things, and this probably is something that people don't understand, is how does DocuSign price their products? This is really important to understand as we look at the future of DocuSign and how companies adopt this product and end up potentially paying more every year. There's really two key components. As product functionality, whether you're a single-user, a business pro, or buying the enterprise platform, there's a couple of different platforms, and this is really [about] features. What kind of features do you want, and how many users are generally going to log into the platform. That sets a base subscription fee.

Then they tag on components. There's no magic formula that they publish, but this is certainly what goes through the contract process and the pricing process for enterprises is they look at the capacity of what's called envelopes. Think of envelopes as a document that needs to get a couple of signatures, that's running around the internet to make those happen. A company when they're first signing on the DocuSign has to estimate how many envelopes they need. Well, interestingly enough, most companies really have no idea. They have never really done this. The centralized, even the contracts part of a company may not even be centralized, but think of all the different kinds of documents that get signed from HR, to facilities, to IT, and there's no really central place associated. Here's how many things we need to get signed, so a lot of times, companies will actually underestimate this, and this is what I saw for the company that I worked with.

The dollar-weighted contract average length is about 18 months. Most contracts are under 12 months or at 12 months, and then about a third of them are over 12 months. Let's see how this plays out. I guess one of the things that could play out is as envelopes are used up, that's something that DocuSign knows, because this is cloud software, so that gives the salesperson an opportunity to come back a couple of months later, 3, 6, 9 months before the contract is up, is going, hey, you guys, how do you feel about the product? Is it doing what you want? It seems like you're using this way more than you expected. That gives them an opportunity to come back and talk to them about upping their contract volume, or even upping it from a functionality standpoint.

One of the other key factors that you need to understand about DocuSign, is 88 percent of its revenue comes from its enterprise and commercial customers. These are large corporate customers businesses that have multiple employees, probably in multiple locations. Look what the customers have done, it's close to doubled over the past couple of years. Up 50 percent, almost 60 percent here. Just a tremendous gain over time.

There is a ton of companies that are in their first contract, and their first time they've estimated the envelopes. The other piece that happens, is look at this net dollar retention. You could not have a better-looking net dollar retention chart. Is just going up over time and this is really impacted, I think, by larger companies signing on the DocuSign, and realizing the benefits across their organization for more use cases and more departments, and potentially even integrating it into existing infrastructure and process workflows.

This [chart] isn't quite revenue growth. It's a rolling four-quarter revenue growth year-over-year, but it gives you some indication is this growth is accelerating. If you talk about inflationary periods and the salesperson comes back and says, hey, you need to renegotiate your contract and it went up by five percent or went up by seven percent.[laughs] There is no way the company is going to say, well, we're not using the product as much as we thought we can get by on paper signatures. Nobody is going to say that. I think DocuSign is well set up, in any environment going forward even in an inflationary period.

Brian Withers owns shares of DocuSign. The Motley Fool owns shares of and recommends DocuSign. The Motley Fool has a disclosure policy.

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