DocuSign Inc. (DOCU, Financial) offers capital growth potential after its 36% rise over the past year.
The electronic document agreement specialist is investing in new technology to strengthen its market position and is seeking to differentiate itself from competitors through acquisitions.
Growth by acquisition
DocuSign acquired Seal Software in February for $188 million. Seal Software uses new technology that can search large volumes of legal agreements to compare and contrast different contract terms.
This represents a significant improvement from previous technology that has only been able to search legal contracts through keywords. This helps to reduce the amount of time that Seal Software’s customers spend in reviewing legal agreements, which could lower their costs.
Seal Software’s technology also identifies areas of possible risks for its customers. This helps to further differentiate it from competitors and may lead to it increasing the size of its market share in upcoming quarters.
DocuSign plans to integrate Seal Software’s technology across its existing products. This could enhance the company’s overall appeal to potential customers. Integration may also lead to higher spending from each of DocuSign’s existing customers who add the new technology to the list of services they already purchase from the business.
New product features
DocuSign is increasing the use of artificial intelligence within its products. For example, in the first quarter of fiscal 2021, it released a feature called auto-tagging that is used to automatically determine the places on a document for signatures, dates and other information. Previously, this process had to be done manually. As such, this could improve the company's efficiency, helping it to increase its appeal among consumers.
In addition, the business is developing a new product called Agreement Analyzer. It automatically summarises the risks posed by a specific document to the company that is set to sign it. It then has the ability to make recommendations to overcome those risks. This could help to further differentiate DocuSign’s products from those of its rivals, and may help to increase its market share in upcoming years.
Potential difficulties
The spread of the coronavirus could negatively impact the company’s financial performance in the short run. It is likely to cause a slowdown in the rate of global economic growth, which may lead to reduced demand for the company’s services.
Covid-19 has already caused disruption to DocuSign’s operations. For example, the business cancelled its North America Customer Conference in March 2020, streaming it online instead. It has also instructed all of its staff to work remotely from home. Similar changes to its operations could be ahead, which may limit DocuSign’s ability to win new customers and to deliver an improving financial performance.
In response, the business continues to increase the amount spent on its services by its existing customers. For example, in fiscal 2019, its dollar net retention rate was 117%. This means existing customers spent 17% more on average with the company in 2019 than they did in 2018.
Even if DocuSign is only able to increase its customer numbers at a modest pace in the short run, it may be able to sell new products and services to its existing customers. It may even experience higher demand for its services as the coronavirus outbreak causes companies to seek ways to reduce their costs through the use of AI.
Outlook
Market analysts forecast DocuSign will report an 80% increase in earnings per share in fiscal 2022. Its forward price-earnings ratio of 168 may be high, but its growth strategy could catalyze its stock price in the coming years.
Disclosure: The author has no positions in any stocks mentioned.
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