Are DocuSign Shares Still a Buy After Falling 8%?
September 4, 2020
E-signature and agreements solutions provider DocuSign Inc (NASDAQ: DOCU) saw its shares fall sharply, closing Thursday’s trading day down 8.7%.
The company reported better-than-expected earnings after the market closed, yet guidance wasn’t as robust as expected. DocuSign shares fell an extra 9% in after-hours trading.
For readers unfamiliar with the company, DocuSign effectively allows businesses and individuals to carry out the signing of agreements digitally – primarily through e-signature.
However, that’s only the first step. Once clients are onboard with the flagship e-signature product, DocuSign offers an “Agreement Suite” of products that covers a wide range of agreement generation.
The firm’s second-quarter 2021 (DocuSign has a fiscal year ending 31 January 2021) earnings report was the continuation of a trend that Covid-19 accelerated. Basically, the need to digitise agreement processes became paramount as people worked from home.
Although DocuSign’s numbers weren’t anything close to the scale of growth of a Zoom Video Communications Inc (NASDAQ: ZM), for example, it wasn’t anything to sniff at either.
Revenue for DocuSign’s latest quarter grew 45% year-on-year to US$342 million versus consensus expectations of US$320 million.
Even better, it grew its total customer base 39% year-on-year to around 750,000. One of the best things to love about its business is that classic SaaS benefit – recurring subscription revenue.
Out of DocuSign’s overall revenue, a whopping 95% is recurring revenue that comes from subscription to its services. And the gross margin of that subscription service is juicy – 83% in its latest quarter versus 78% for the overall business.
Digital signatures are here to stay
CEO Dan Springer reiterated on the latest earnings call that the need to digitise business processes has seen its product become a necessity in the current environment and that he “doesn’t see any sign of customers returning to paper once the pandemic is over”.
The stickiness of DocuSign’s product is testament to how it dominates the space – the company currently has around 70% market share in the e-signature market. In addition, the company’s acquisitions strategy has been shrewd.
DocuSign bought SpringCM (a document generation and contract lifecycle management specialist) in late 2018 and then Seal Software (an AI-driven contract analytics firm) earlier this year. Most recently, in July, it bought Liveoak Technologies – a remote notarising service.
Cementing its leadership position
Integrating the companies’ respective capabilities into DocuSign’s overall product offering is only going to strengthen the firm’s competitive position in an e-signature space that has a total addressable market (TAM) of US$25 billion.
Add on the whole contract lifecycle management market and the TAM doubles to US$50 billion. In my view, DocuSign’s growth is just getting started.
Even though DocuSign shares are up around 225% so far in 2020, it’s a long road of growth ahead. And this software company is taking it slow and steady.
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Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.
In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.