Sept 5 2020 DocuSign: Warning Remains

Summary

DocuSign dipped 10% following a big FQ2 beat.

The company has substantial opportunities to grab market share.

The stock trades at an insane EV of 25x FY22 sales.

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After a strong quarter, DocuSign (DOCU) slumped over 10% due to the excessive valuation of the tech stock heading into FQ2 results. The eSignature company has greatly benefited from a remote work economy. My investment thesis already warned investors the stock wasn't a bargain far below 0. The further rally in the stock only exaggerated an extreme valuation situation here.

DOCU DocuSign, Inc. daily Stock Chart

Love The Business

Even prior to the COVID-19 induced push for employees to work remotely, DocuSign had a very appealing business. The company offers a leading solution for digital agreements. The virus shutdown pulled forward business from corporations dragging their feet on electronic signatures.

For FQ2, sales surged 45% to 2.2 million while billings were up an incredible 61% to 6.0 million. The numbers accelerated from the prior quarter where the company generated 39% growth on revenues of 7 million while billings were up 59% to 2.1 million.

The market loves to see this type of growth. The issue here is that DocuSign already stated that 1H customer additions already topped the total for last year. These customers are highly unlikely to go back to paper documents after implementing a working digital strategy. The issue is signing up more and more customers to maintain the current growth rates necessary for accelerated revenue growth.

The eSignature company guided to FQ3 revenues of 0.0 million for 44% growth. DocuSign has historically beaten estimates by a solid margin so investors should expect the company to print another quarter with accelerated revenue growth.

Business development remains very strong highlighting another reason to love the company. The company continues to develop DocuSign Notary and acquired Liveoak Technologies in order to accelerate the ability to perform remote agreements via video conferencing. The company already had a TAM of  billion and the notary business alone adds another billion to the addressable market opportunity. The company hardly even captures 5% of this market now providing substantial growth opportunities in a growing segment.

DocuSign is even profitable which isn't always true of cloud-software platforms. In FQ2, the company generated a non-GAAP profit of .17 and free cash flow of .8 million.

The business isn't just hype based on future growth. Clearly, investors shouldn't hesitate to love the business.

Hate The Stock

The issue with DocuSign is the stock valuation. Too many new retail traders want to focus solely on whether or not they love the company. The recent rally has involved a lot of investors that don't care about price which is what ultimately matters.

The stock is up 419% over the last year after trading below last September. In addition, DocuSign printed a x% gain YTD when hitting the all-time high of 0.

Investors need to understand that the dip to 6 doesn't make the stock a bargain. With 203 million shares outstanding, DocuSign has a market cap of billion while quarterly sales only just topped 0 million.

Despite the impressive growth this year due to the desire for corporate agreements to be signed digitally and remotely, the stock is up mainly due to multiple expansion. Based on updated estimates, DocuSign now trades at over 25x FY22 revenue targets.

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Historically, a stock trading over an EV/S multiple of 10x was expensive. Some fast growing stocks were able to maintain higher multiples on faster growth, but DocuSign wasn't an exceptionally fast growing company prior to the virus.

The pull forward sure doesn't alter an expectation for revenue growth to return back into the 30% range next year. The average analyst estimate for revenue growth beyond FY22 only appears in the 15% to 20% range.

Takeaway

The key takeaway is that investors need to start learning how to a love a company, but not the stock. DocuSign fits perfectly into this scenario of a great company with the stock trading at an insane valuation. Investors should not be tempted by the recent dip in the stock.

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