This Stock is a Definite Buy

DocuSign (NASDAQ:DOCU) has fared better than many stocks during this pandemic. DocuSign stock recently closed at 52 week highs of nearly $170. Its 52 week low is $43.13. So, clearly investors who jumped in a year ago made out handsomely, but is there remaining momentum for DocuSign? Or have shares plateaued?

The crux of DocuSign’s business is creating legally binding signatures without paper.

With more employees working remotely, and precaution against human contact becoming increasingly important as a result of the pandemic, it’s easy to see why the company has fared well.

Further, DocuSign increases ease of business and that translates to profit in any environment.

DocuSign stock has quadrupled in the past year.

The company is on the radar of many investors due to its meteoric rise. Investors now are left deciding how they feel about the company’s ability to continue its upward march.

A Closer Look at DocuSign Stock
As a tech company, margins are naturally high. Physical resources aren’t highly utilized in the company’s product, so overhead is low. DocuSign released strong financial results a few weeks ago reporting a GAAP gross margin of 75%. It also gave guidance of an 80% Non-GAAP gross margin for the entire year of 2020. In short, the firm makes a lot of money per sale.

DocuSign has a price-to-sales ratio of 28.60 as of June 23, 2020. This metric, taken in isolation, means very little. DocuSign’s PS ratio is very poor within its industry. In fact, DocuSign is only in the sixth percentile of the software industry.

Markets can view this one of two ways: either the company is too expensive for the sales it generates, or the ratio is high because the company is going to unlock new growth. As this shows, DocuSign stock benefits from a strong valuation. Tech companies generally do as their growth potential is rewarded by the markets. Thus, buyers are willing to pay more for a dollar of earning power in these firms.

As DocuSign has performed through the pandemic, markets will naturally cap DOCU’s valuation sooner or later. Unbridled optimism always cools as reality settles in.

DOCU Stock and Growth
Markets are going to determine some sort of equilibrium for DocuSign and valuation metrics along with revenue sources will factor heavily in that calculus. Nevertheless, DocuSign’s moment is here.

Its opportunity is to get more and more paying subscribers and increase its revenue base. According to data on page 22 of its latest 10-Q, DocuSign generates around 95% of its revenue from subscriptions.

DocuSign is by far the market leader in this segment with roughly two-thirds of the market. And with reports suggesting a CAGR of above 35% for e-Signatures in the coming years, growth is only increasing.

There’s a lot of room to grow as more and more employees working from home are going to need its services. They won’t be firing up the fax machine any time soon. That high CAGR for the industry indicates just how nascent this service really is.

Diversification and DocuSign
The company is trying to establish itself as the go-to, end-to-end e-signature service and initially depended on smaller VSBs (Very Small Businesses) for a higher share of revenue. Now DocuSign has 660,000 customers, 85,000 of whom are enterprise and SMB customers. They define those 85,000 as being firms from 10 employees up to those in the Global 2000.

DocuSign has a presence in most countries. International revenue was up 46% for the first three months of 2020 compared with the same 2019 period. Investors should take that with a grain of salt. DocuSign focused on initial international growth in English-speaking, common law nations which represent a much easier sale.

The company will not be able to replicate that growth trajectory in civil law nations, not to mention language barriers. Nevertheless, overall growth prospects are strong with tons of growth in the English-speaking world alone.

The Bottom Line on DOCU Stock
Although DocuSign shares are probably currently overvalued I don’t think that alone will cause shares to plateau soon. There are just too many tailwinds pushing the company forward.

DocuSign will garner a lot more scrutiny moving forward. Investors are going to call its valuation into question. Consequently, market sentiment might cool slightly, but I wouldn’t expect much.

There is such a huge CAGR forecast for this industry that I think investors will simply decide to get in now, valuation metrics be damned. The company has been thrust into the spotlight during the pandemic and is hitting its stride in a growth industry. Even with valuation as high as it currently is DOCU’s stock should appreciate because of revenue growth alone. I think it is a definite buy.

— Alex Sirois

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Source: Investor Place