Why DocuSign Is Set to Soar

The company's multi-product strategy could improve its prospects

Article's Main Image

The introduction of new products could boost DocuSign Inc.'s (DOCU, Financial) stock price. Last quarter, it launched a range of new services that could differentiate it from peers and improve customer loyalty.

It has also reorganized its sales team so that it can offer increasingly specialized services, while also benefiting from cross-selling opportunities.

Although the stock has a high valuation, its forecasted growth rate suggests it could have investment potential after an approximately 5% decline over the past year.

1463943295.png

Investing in new products

The introduction of new products could enhance DocuSign’s competitive advantage and lead to improving financial performance, particularly through cross-selling opportunities.

For example, it launched DocuSign Gen in the most recent quarter. The technology enables sales representatives and other users to automatically generate signature-ready contracts in a short amount of time. It is targeted toward small- and medium-sized businesses that use the Salesforce.com (CRM, Financial) system, though it can be used in other systems if necesary. It is expected to add value for customers through improving the efficiency of its users, while reducing the potential for human error.

The company also released its DocuSign Click service, which enables users to capture consent to standard agreement terms on websites, such as a privacy policy, with just one click. In terms of its long-term growth potential, Click could gradually replace in-house solutions that can be inefficient to maintain. The service offers a new growth area for the company, which could increase the size of its total addressable market.

Specialized sales

Docusign’s decision last quarter to split its sales team in two could make it more efficient and, ultimately, more successful in generating sales growth. It has rolled out a specialized sales team that focuses on new customer acquisitions, with the remainder of its sales team now concentrating on cross-selling opportunities among existing customers.

The decision follows a successful test of the new sales model in the previous fiscal year across North America, leading to a net increase in new logos. The move could provide greater specialism within its sales teams, which could enhance its competitive position as it rolls out a wider suite of products.

Threats

DocuSign’s decision to focus on multi-product sales introduces an additional layer of complexity into its business model. For example, the Agreement Cloud service, which was launched last quarter, seeks to digitalize how organizations prepare, sign, act on and manage their agreements. This is in contrast to its single-product e-signature offering. This means there are more people involved in the sales process, which elongated some of its upsell cycles in the most recent quarter. This trend may continue and could mean that some sales are delayed as it seeks to perform a greater range of services to each customer. In the near term, this could place a degree of pressure on its financial performance.

Over the long term, the rollout of a wider range of products is expected to increase DocuSign's total addressable market. Having a multi-product offering may also lead to an increasingly loyal customer base since the company may eventually provide a number of services for customers that makes it an integral part of their operations. This could provide additional pricing power that supports margin growth in the long run.

Outlook

In the next fiscal year, the company is projected to grow earnings per share by 95%. This helps justify its forward price-earnings ratio using current fiscal year forecasts of 288.

DocuSign's continued investments in its product range could lead to a stronger competitive position as well as an increasing total addressable market.

The split in its sales team could deliver enhanced cross-selling opportunities, while allowing the business to move toward an increasingly specialized, multi-product offering.

Having underperformed the S&P 500 by 12% in the last year, DocuSign has investment appeal.

Disclosure: The author has no positions in any stocks mentioned.

Read more here:

Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.