DocuSign (NASDAQ:DOCU), a titan in electronic agreement and signature technology, soared during the COVID-19 pandemic as companies hastened their transition to digital agreement processes. However, despite an astronomical 85% slump from its peak, blamed on a post-pandemic revenue slowdown and competition onslaught from behemoths such as Adobe (ADBE) and nimble upstarts, DocuSign remains a force to be reckoned with.
Amid these hurdles, DocuSign’s competitive stance, robust free cash flow, and a burgeoning e-signature market could propel it towards a reinvigorated growth trajectory. The company, with its downtrodden stock, could even attract takeover interest, given its substantial market share and the burgeoning e-signature and agreement landscape. DocuSign appears primed for a growth resurgence in the upcoming quarter.
DocuSign maintains a commanding grip on the e-signature industry with a market share exceeding 60%, despite the encroachment of new players. This dominant position bestows a potent advantage in the tech realm, offering substantial brand visibility and customer loyalty. The company’s market presence implies that existing customers are unlikely to switch providers, even in the face of potentially lower costs offered by competitors.
For large enterprises, the hassle and potential disruption associated with shifting to a different e-signature service can outweigh the benefits of cost reduction. Once customers adopt DocuSign, they tend to stick with it. While its market share has marginally dipped from over 70%, this does not portend a weakening competitive position. Moreover, DocuSign’s moderating dollar net retention rates and its continued expansion of the customer base quash any concerns.
In essence, a sizeable portion of its revenue deceleration can be ascribed to the front-loaded demand for e-signatures during the pandemic, which has normalized as numerous large customers and small businesses have adopted DocuSign’s software. Similarly, Adobe also witnessed a substantial growth slowdown from well over 20% to just above 10% in its latest quarter. However, unlike DocuSign, Adobe’s valuation has rebounded significantly over the past year.
Despite the recent growth slowdown, DocuSign still possesses a vast opportunity for expansion in terms of revenue and margins, given the burgeoning e-signature and document analysis market. With an estimated $50 billion market opportunity by 2030, even a 30% market share could translate to $10 billion in annual revenues, potentially resulting in $3 billion in annual cash flows, considering the current free cash flow margins of approximately 30%.
DocuSign’s recent growth slump places it in the league of pandemic favorites such as Zoom Video Communications (ZM), Twilio (TWLO), and Pinterest (PINS), all boasting similar free cash flow margins and growth rates.
Although Adobe commands a valuation three times higher than DocuSign, it arguably deserves a premium due to its more diversified business, larger scale, superior free cash flow margins, and a stronger moat attributed to a broader product portfolio. However, despite comparable growth rates, DocuSign trades at a lower valuation than Zoom and Dropbox, both of which exhibit much lower growth rates.
|Levered Free Cash Flow margin (TTM)
|Market Cap. / Employees
DocuSign’s value per employee is among the lowest in the software sector, given comparable free cash flow margins. Notably, the company’s free cash flow margins have notably improved over the past quarters, exceeding 30% in its last two quarters. Consequently, its comparatively low value per employee compared to software peers such as Dropbox intimates that DocuSign may be undervalued.
While companies like CrowdStrike boast high free cash flow margins and superior growth rates on a trailing 12-month basis, the recent substantial improvement in DocuSign’s free cash flow margins suggests that it could be underestimated.
DocuSign’s Undervaluation and Market Potential
DocuSign, a leading player in the software industry, has been experiencing a consistent surge in market activity, as evidenced by a substantial revenue boost in its latest financial quarter. The company’s astounding growth rate and robust free cash flow margins have set it apart from its industry peers, leading to its trade at considerably low multiples, which is almost unheard of in the highly competitive software space.
Boasting an extensive sales force of close to 7000 employees, the company’s stronghold in the market and selling capabilities have been fundamental in steering profitable growth for its suite of software products. Moreover, DocuSign’s international expansion has been particularly impressive, with a staggering 17% increase in revenue in the last quarter, albeit making up only a fraction of the company’s total revenue. This international growth is projected to be a pivotal driver for future expansion.
Despite a slight deceleration in revenue, DocuSign’s deliberate reduction in marketing expenditure, as part of its strategy to prioritize profitability, is a nod towards its organic growth capabilities. This approach sets it apart from competitors and lends credibility to its ongoing ascendancy in the industry.
The Untapped Potential
In the midst of its growth slowdown, it’s crucial to recognize that DocuSign remains the dominant force in the market, with projections indicating rapid future expansion. While its valuation may seem modest at three times its annual sales, the company’s profitability remains resilient. This foundation not only paves the way for potential inorganic growth but also presents opportunities for shareholder-friendly initiatives such as share buybacks.
Additionally, the under-appreciation of DocuSign’s competitive edge and stability, particularly in relation to its valuation, warrants a fresh perspective. Its undervaluation, in my view, offers a safety buffer as opposed to its pre-pandemic peak, which opens the door for potential growth and investment opportunities.
Leveraging its impressive sales force, which is a notable asset, DocuSign is poised to fuel customer growth, culminating in a surge in billings, especially in the impending quarter and beyond. Furthermore, buoyed by its diminished valuation, the company could become an enticing acquisition prospect for leading industry players such as Salesforce or SAP.
Nevertheless, it is imperative to acknowledge the possible risks accompanying DocuSign’s trajectory. The risk of market share erosion, particularly with the aggressive expansion of competitors like Adobe in the e-signature sector, poses a significant threat. Moreover, should the company’s growth rates continue to decelerate, a reassessment of its valuation based on profitability might be inevitable. Yet, with effective mitigation of these concerns, shares could potentially unlock value beyond the upcoming quarter.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.