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Robert Stephens, CFA
Robert Stephens, CFA
Articles (95) 

Why Docusign’s Stock Price Looks Set to Soar

The company could offer recovery potential

December 13, 2018 | About:

Its recent acquisition of SpringCM appears set to catalyze Docusign (NASDAQ:DOCU)’s financial performance. Alongside partnerships with a variety of popular applications, the acquisition could increase the company’s total addressable market. Since it currently serves a small proportion of its target market, it may benefit from continued System of Agreement transformations at a variety of organizations.

Although the company is spending heavily to acquire new customers, it has a high level of repeat business. This provides it with greater sales visibility, while a high net revenue retention rate shows that existing customers are increasing their exposure to the company’s products.

Having fallen 33% in the last six months versus a 4% decline for the S&P 500 index, the stock appears to have investment potential.

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Market size

The size of Docusign’s total addressable market (TAM) could provide it with growth opportunities. The company estimates that its core eSignature business has a TAM of $25 billion, which is currently largely underpenetrated. Although it is currently adding 85,000 new users per day, its current customer base represents less than 3% of its core target market. It could increase in size as a larger proportion of businesses and organizations across the world move from paper to eSignature.

The company’s TAM could rise as a result of continued System of Agreement transformations at a variety of businesses and organizations. This is where companies evolve from using eSignature in isolated cases to connecting it with a variety of other systems required to prepare, sign and act on management directives. A better-connected business that automates the agreement process from start to finish could reduce costs and improve efficiency for customers. Docusign has also invested heavily in a range of prebuilt integrations in order to improve its connectivity with products and services from the likes of SAP (NYSE:SAP) and Salesforce (NYSE:CRM).

Growth prospects

The recent acquisition of SpringCM has allowed Docusign to provide a fuller System of Agreement platform that includes new products and a range of improved technologies. The company already offers the SpringCM flagship product to its enterprise segment. It also plans to launch a new product in the first half of 2019 called Docusign Jet. This is based on SpringCM technology for document generation and could further increase its TAM.

Docusign is focusing on growing its partner ecosystem. It recently announced that its eSignature product will be integrated with a further Salesforce product, being included in its CPQ (configure, price and quote) software. It will also partner with Dropbox (NASDAQ:DBX), with which it is now possible to send and sign agreements using Docusign within the service. Further instances of the company increasing its exposure to a diverse range of platforms where it is able to add value to customers, such as through efficiency gains, are expected in the future.

Risks

Docusign’s valuation may suggest that it lacks a margin of safety. The company has a price-sales ratio of 10. It was loss-making last year, but using fiscal year 2020’s forecast earnings per share of 20 cents, its current stock price equals a prospective price-earnings ratio of 215. The amount being spent on customer acquisition is also relatively high. In the previous fiscal year the company spent $278 million on sales and marketing. This added 85,000 new customers per day on average as it seeks to rapidly increase its market share.

Although customer acquisition costs may be high, a net revenue retention rate of 114% suggests that not only do customers remain with the company, they also increase their spending over time. Recurring revenue of 91% from a subscription-based business model means that sales are likely to be relatively sticky, partly as a result of high switching costs. Supporting this is the seamless integration the company’s products enjoy with other applications. Over 300 prebuilt integrations with applications made by companies such as Microsoft (NASDAQ:MSFT) and Oracle (NYSE:ORCL) mean that customers are likely to remain with Docusign once it becomes an integral part of their organization.

Outlook

Docusign’s underpenetrated TAM could provide it with a growth catalyst. Its increasing use of partnerships and integration with popular applications could strengthen customer loyalty and improve customer retention rates. Investment in new products following the acquisition of SpringCM and the System of Agreement transformations that are ongoing across a variety of organizations could boost its financial performance.

Although it has a high valuation, is loss-making and is spending heavily to win new customers, its business model provides sticky revenue as well as clear growth catalysts through improving efficiencies for customers. Having underperformed the S&P 500 in the last six months, it could have investment appeal.

Read more here: 

Why Mattel’s Stock Price Could Beat the S&P 500 

Why JetBlue’s Stock Price Could Recover After 20% Fall 

Why Ulta Beauty Could Keep Beating the S&P 500 


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