DocuSign (DOCU -1.99%) is widely seen as one of the world's foremost providers of digital signature software. The company has over 1 million paying customers across multiple industries and operates in over 180 countries worldwide , making it a true global solution for e-signatures. The company was founded back in 2003 and made its debut on the NASDAQ exchange back in 2018. Since its IPO, the stock has returned nearly 600% and holds a market cap just below $55 billion. 

Couple looking at computer with lawyer.

Source: Getty Images.

DocuSign And The Pandemic Trade

DocuSign was one of those companies that investors and traders alike flocked to during the 'pandemic trade' which was largely due to the perception that the COVID-19 pandemic would provide tailwinds for its core business. With many offices closed to the public, businesses began relying on digital means to manage agreements and transactions, particularly in industries like real estate and legal and financial agreements, where clients and customers could now sign documents remotely. DocuSign anticipates that through its products and services, it has an estimated total addressable market of $50 billion , which is something investors should pay attention to.

The company isn't just an e-signature brand, though, and has taken strides to further diversify its portfolio of products. DocuSign has added segments like its contract lifecycle management platform, eNotary remote agreements and has even integrated artificial intelligence into its agreement analyzer. With these products, DocuSign is creating an efficient business management system that is trusted by some of the largest companies in the world including Visa, Apple, Microsoft, Samsung, Verizon, and Netflix. 

Docusign's Strong Partner Catalog

Source: DocuSign

DocuSign continues to show steady sequential quarterly growth and shows no signs of slowing down even though the worst of the pandemic is hopefully behind us. Subscription revenues grew by 50% year over year in FY21, while total revenues grew by 49% year over year. With a steady rise in subscription revenues, it stands to reason that DocuSign's subscriber growth is also continuing. The company has added new clients at a 42% CAGR since 2013 and remains the number one e-signature solution brand globally.  It is also important to note that the bulk of the revenue comes from subscription revenue.

Docusign's Strong Revenue Growth

Source: DocuSign

With software-as-a-service-based companies that use a subscription model, the emphasis is not on how many customers it has, but how many customers it can retain. That is why the net dollar retention level should always be taken into account. For DocuSign, the net dollar retention rate sits at an impressive 124%, which means that customers on average pay 24% more than they did the year before.

DocuSign's Stellar Dollar Net Retention Trend

Source: DocuSign

DocuSign is also focusing on attracting more international clients and reported a 77% year-over-year growth in international subscribers. Its total customer base has been growing at a stellar 42% which definitely constitutes a high growth opportunity.

DocuSign's Strong Customer Base Growth

Source: DocuSign

While that is impressive, international clients only account for 22% of DocuSign's revenues, showing that the company's global expansion is still in its early stages.

The valuation is quite stretched right now because of the sensational revenue growth that was at least partially brought about by the pandemic. DocuSign supports digital transformation but a price to sales ratio of 29 is pretty lofty. Investors have likely priced an elevated multiple on the stock because of the strong growth prospects and for right now, the company is delivering. 

DocuSign has reached the level of familiarity that all consumer-facing brands desire. The name has become synonymous with the product. There is no name that is more connected to e-signatures than DocuSign, and aside from some pesky competition from Adobe, DocuSign has no real threats and is undoubtedly the global leader. The stock has been consolidating for the better part of a year and may be due for a breakout sooner rather than later. DocuSign has a history of strong reactions in either direction following its earnings calls, so we should probably expect the stock to trade within range until early December. DocuSign is a long-term winner, but the fundamentals of the company now need to catch up to the price of the stock.

The Takeaway

Valuations are definitely stretched right now, but for good reason. If you believe the digital transformation trends will persist then you'll definitely want to take a position here. Stocks like DocuSign were expected to fall apart once the economy reopened. The company is making some notable moves and the new product offerings are a definite positive. The stock seems to have been taken over by momentum traders for the time being but it's difficult to say where the aggressive buying will end. I see no good reason for shareholders to part with their shares here and would argue that the stock offers a great long-term opportunity.