Despite the human tragedy of the Covid-19 pandemic, there are many companies that benefited from the residual effects of the lockdowns and remote work. These include the so-called stay-at-home companies such as Zoom Video Communications Inc. (ZM, Financial), Netflix Inc. (NFLX, Financial) and DoorDash Inc. (DASH, Financial). One company that had a thriving business before the pandemic but received a substantial boost was DocuSign Inc. (DOCU, Financial).
DocuSign provides electronic signature software on a global basis. The company provides e-signature solutions that enable businesses to digitally prepare, sign, act on and manage agreements. Other offerings include CLM, which automates workflows across the entire agreement process, Insights that use artificial intelligence to search and analyze agreements by legal concepts and clauses, Gen for Salesforce, which allows sales representatives to automatically generate agreements with a few clicks from within Salesforce, Negotiate for Salesforce that supports for approvals, document comparisons and version control, Analyzer, which helps customers understand what they’re signing before they sign it, and CLM+ that provides artificial intelligence-driven contract lifecycle management.
Additional products include Guided Forms, which enable complex forms to be filled using an interactive and step-by-step process, Click that supports no-signature-required agreements for standard terms and consents, Identify, a signer-identification option for checking government-issued IDs, and Standards-Based Signatures, which support signatures that involve digital certificates.
The company was founded in 2003 and went public in May 2018. It currently has a market capitalization of $13 billion, which is down almost 80% from 2021 highs.
Agreement Cloud
DocuSign Agreement Cloud is the company’s signature cloud software platform that automates and connects a typical client agreement process. DocuSign eSignature is the leading electronic signature product based on current global market share data. The Agreement Cloud also includes other applications for automating before and after signature processes. Agreement Cloud includes hundreds of partner combinations with popular businesses around the world, so these agreement processes can integrate with larger business processes and data. As of Jan. 31, the Agreement Cloud had over 1.1 million customers and more than a billion users in over 180 countries. The system can automatically generate an agreement by integrating data in other systems, supporting negotiation processes, verifying identities, assisting remote online notary, collecting payment after signatures and using artificial intelligence to analyze a larger number of agreements for risks and opportunities.
Financial review
The company recently reported first-quarter results for the period ending April 30 which missed analysts' expectations. Total revenue increased 25% compared to the prior-year period to $588.7 million, while billings increased 16% to $613.6 million. The company reported an earnings loss of 14 cents versus a loss of 4 cents per share last year. The company typically expenses massive amounts of stock compensation and the first quarter was no exception with $110.7 in stock compensation. That represents almost 19% of total revenue. The company claims its not relevant, and excludes the stock comp to report non-GAAP earnings per share in the quarter of 38 cents. However, stock compensation is a real expense. As Warren Buffett (Trades, Portfolio) once famously said:
“If compensation isn't an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of earnings, where in the world do they belong?”
This large and ongoing share issuance dilutes the existing shareholder base who are put in the position of funding employee compensation at the shareholders expense.
The company has cash and investments of $1.06 billion as of quarter end and long-term debt of $719 million, comprised of convertible notes. However, the company has a large contract liability of $1.0 billion, which is essentially a call on the cash position.
Valuation
The company provided guidance on its earnings release, which called for revenue of approximately $2.48 billion and a non-GAAP operating margin of 17%. The company is not profitable and net losses are expected for the next several years. On a non-GAAP basis, earnings per share estimates are approximately $1.94, which puts the company trading at 34 times earnings, which still seems excessive, particularly when considering execution risks.
Using the GuruFocus discounted cash flow calculator with non-GAAP earnings per share of $2 as the starting point and applying a generous 15% long-term growth rate, the value for DocuSign is approximately $50, still well below today's price.
Guru trades
Gurus who have purchased DocuSign stock recently include Jim Simons (Trades, Portfolio)' Renaissance Technologies and PRIMECAP Management (Trades, Portfolio). Gurus who have reduce positions in the stock include Catherine Wood (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio).
Conclusion
Despite the near 80% drop in the stock price and expected strong double-digit growth rates going forward, the company appears to be overvalued. At some point, investors will require a positive return on capital to justify their investments, and that looks to be a long way off.
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