For many, the concept of walking into an office and signing an agreement with pen and paper is a thing of the past. The advents of technology allow for seamless transfer of everyday things like money, communications, and even signatures. DocuSign (DOCU 0.60%) is hailed as a market leader in the electronic signature arena. However, while DocuSign has focused primarily on easy transfer of contracts, many of its competitors extend into other digital markets. Now that the market excitement over the stock has faded, is DocuSign still a buy?
Competition is tough to beat
DocuSign allows users to send and receive contracts such as rental leases, sales quotes, or other legal documents electronically. Once a user receives the document, they are prompted to "sign" the contract with a pre-created digital signature. The entire process can be completed in a few clicks. While this is certainly convenient, it is not exactly the most disruptive tech, as the underlying features are not entirely proprietary.
It's not surprising that the company faces stiff competition from the likes of other technology companies, namely Adobe and Dropbox. The biggest difference between DocuSign and its competition is that digital signatures are only one component of a broader product suite for Adobe and Dropbox. DocuSign made a number of small investments in ancillary technologies that it is integrating. The lingering questions are whether these investments are any benefit to the company, and how quickly DocuSign is scaling compared to its competition.
Are the investments paying off?
Roughly one year ago, DocuSign's management announced that the company was forming an in-house venture capital fund in an effort to make strategic investments and enhance its product portfolio. While several Silicon Valley juggernauts like Salesforce, Microsoft, and even Oracle all have investment funds within its corporate umbrella, at the time of DocuSign's announcement this particular fund didn't seem to align with the rest of its tech counterparts.
In the year since the company formed DocuSign Ventures it has made a total of one investment, in a professional services consulting firm called Uptima. Generally speaking, services businesses do not carry the higher-margin profiles of software businesses. Another reason why this investment is a head-scratcher is because the company specializes in both DocuSign integration and the Salesforce product suite. It may be no surprise that Salesforce Ventures also participated in the investment. Given the massive difference in size and growth potential compared to Salesforce, it would not be surprising if the highly acquisitive customer relationship management company eventually acquired DocuSign.
By comparison, DocuSign's competition is showing just how aggressive the mergers and acquisitions market can be. For example, in September Adobe rocked the tech world when it announced its massive $20 billion takeover of competitor Figma. When speaking about the deal, Adobe's management highlighted Figma's annual recurring revenue (ARR) growth, gross margin, and total addressable market. Figma is forecasting it will end the year with around $400 million in ARR, up from $200 million in 2021. While the company is doubling its ARR base, it is also operating at a nearly 90% margin.
Although $20 billion may seem like a high price tag, Adobe is clearly investing in an efficient, subscription-based business in a growing market. By comparison, DocuSign's lone investment since the debut of its fund is in a lower-margin services business, in which its competitor Salesforce also retains equity ownership.
Keep an eye on valuation
It's hard to believe that nearly one year ago DocuSign's market capitalization was hovering around $60 billion, compared to its current valuation of $8 billion. There is little denying that DocuSign's valuation got ahead of itself during the short-lived meme-stock era.
As far as the company's financials go, DocuSign has managed to grow its subscription revenue well over the $1 billion mark. However, management has failed to grow revenue faster than operating expenses. As a result, DocuSign continues to operate at a net loss. On top of that, over the last year the company has done very little to augment its product suite and differentiate itself from its competition. By comparison, other technology companies have invested in efficient businesses in growing addressable markets.
While DocuSign's product is user-friendly and offers convenience, the company has not done enough to truly separate itself from its market counterparts. For this reason, it is difficult to justify investing in a money-losing business with easy-to-replicate tech. Although there was money to be made in DocuSign a year ago, it's clear that was more from stock market euphoria than any fundamental reason. I will continue to be a user of DocuSign, but at this point it is difficult to see how the company should earn a position in a well-balanced portfolio.