Has the Bull Already Bolted?

Has the Bull Already Bolted?

We are long-term investors here at MyWallSt and recommend companies that we believe will have consistent growth for years to come. Updates are an opportunity for us to reaffirm our stance on a company while keeping you up to date on its developments. By renewing our comments with the latest information, we ensure that investors have confidence in our selections, regardless of their start date

When DocuSign made its MyWallSt debut in the summer of 2018, it was partially because it fulfilled one of Peter Lynch's favorite investment criteria: being super boring. There is little glamor or excitement in signing paperwork, it's the necessary admin before the real fun can begin, but this makes it an ideal candidate for digital disruption. It also meant that DocuSign flew under the radar of most analysts and investors despite its status as a SaaS company, consistent growth, and killer operating margin of 17%. The stock grew modestly quarter after quarter, gradually climbing 42% by the end of 2019 — but then the pandemic hit.

While its fellow stocks reeled in the wake of a shuttered economy, DocuSign found its day in the sun, rocketing 200% in less than 4 months. Thanks to a combination of accelerated customer acquisition and a new appreciation for stocks that digitize the workplace, DOCU became classified as a COVID stock and watched as its valuation was pushed to 22x sales. Despite this shocking figure, I would argue DocuSign is much more than a work-from-home stock and ask investors to look past the frenzy to see the real potential underneath.

In its most recent quarterly report, the company saw revenue increase 54% year-over-year, added 100,000 customers, and net dollar retention (NDR) reached 125%, up from 112% in Q1 2020. This means that when existing customers renew their contract, they're spending more — a lot more.

Due to DocuSign's capacity-based model, as customers expand and their needs increase so too does their average spend, hence the impressive NDR. So even if the pandemic caused customer acquisition to pull forward, revenue will just keep on growing as this new cohort balloons in the coming years. Better still, CEO Dan Springer doesn't even classify the company's performance as a pandemic pull forward that “pays Peter and takes from Paul”, simply viewing it as evidence of “increasing demand”, believing the company is still in the early days of its expansion. This sentiment is supported by industry figures. The digital signature market is expected to reach $8B in 2027, implying a 28.9% CAGR. With DocuSign leading the pack and its market penetration still low, the company has the potential to record much more impressive gains over the coming decade.

For this reason, DocuSign remains focused on preparing for its future and the “very, very large ocean” of potential customers that remain. According to CFO Cynthia Gaylor: "We are still in the early innings of a large market opportunity. We plan to continue investing for long-term growth, particularly in R&D, sales capacity, marketing, and the scaling of our operations." R&D has become particularly important to the company, which identifies this as its main moat. Currently, it outspends all of its competitors combined and has effectively added a diverse range of products thanks to its strategic acquisitions.

While the pandemic may have pulled DocuSign out of the shadows, it's much more than a fad. It's a digital disruptor with a massive potential market and a considerate management team, which sounds like the perfect buy-and-hold stock to me.

In light of its pandemic performance, we have updated our comments on DocuSign. To view them, click on the stock button below.

Anne MarieAnne Marie

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