Investment Thesis
DocuSign (DOCU) trades for 22x sales its CY2021/FY2022. And while this appears on the surface to be an exorbitant valuation, there are reasons why this valuation is justified.
In fact, this rapidly growing SaaS stock still has more upside potential ahead, despite the recent tech sell-off causing investor trepidation.
DocuSign continues to guide for rapid growth rates, with a Rule of 40 for Q2 2021 above 50%. This stock is worthwhile considering.
DocuSign: Into The Storm
After the tech sell-off that we witnessed last week, many readers may question whether I have not lost my value approach by being bullish DocuSign at this valuation.
There’s no doubt that its valuation doesn’t come cheap (more on this later), but in an environment where many companies are struggling with either visibility or growth or even both, DocuSign still eyes up strong growth rates and impressive visibility.
DocuSign is an e-signature platform. Its value proposition is on making agreement signing quick and painless in a digital world. When customers need to sign consent forms or deeds, DocuSign aims to service this need online.
Furthermore, during the quarter, the company made a small acquisition of $38 million, using its stock, of Liveoak Technologies. Liveoak is a company focused on video identity verification, which gives DocuSign a footing into employing video conferencing as a way to create a detailed audit trail.
But what’s particularly attractive about DocuSign is its growth rates.
Growth Rates Are Strong and Steady
As you can see below, the company’s growth rates are impressively strong and steady:
Source: Author’s calculations, **low-end company guidance
In fact, one of the most compelling aspects of this rapid growth story is just how tight the range in its outlook for full-year revenues are at $1.386 billion at its midpoint, but with a range of just $4 million between the lower end and top-end of its guidance.
In an environment where many companies are having to pull their full-year guidance due to poor visibility, DocuSign’s full-year guidance is remarkably tight and even got raised from its original Q1 2021 guidance.
Rule of 40 and Customer Acquisition Cost Brought Into Focus
A couple of key metrics investors should be aware of is the Rule of 40, where with anything at 40% or above, investors can feel reassured that growth and profit are being balanced.
DocuSign reports a Rule of 40 which handily crosses into greater than 50% (using non-GAAP operating profit margin of 10% and growth rates of 45%).
The company’s CAC Period (Customer Acquisition Cost), measured as:
Sales and Marketing Spend in Quarter 1/[Quarter 2 Revenue – Quarter 1 Revenue]
Leaving DocuSign’s CAC as close to 1.5 years, which is in the middle of the road as far as high-quality SaaS companies go.
One Blemish in the Report: Billings
DocuSign’s billings growth rate Q2 2021 was 61%, after growing 59% in Q1 2021.
However, for full-year 2021, the company is expecting billings to be around 48%. This implies that H2 2021 will be marked by a dramatic slowdown in billings growth rates.
Given that Q3 2021 billings are guided to be around 42%, this implies that Q4 2021 billings are expected to slow down quite dramatically, possibly hitting the low 30 percentile range.
Considering that billings are a very strong forward indicator of SaaS growth rates, investors will not be overly pleased to pay a premium for DocuSign while its billing growth rates slow down.
Valuation – Paying a Premium for Quality
Presently, DocuSign trades at 29x its fiscal 2021 sales. This is after its 20% sell-off witnessed last week and given its raised guidance for fiscal 2021 sales.
Looking further afield, this leaves the stock trading at 22x sales its CY2021/FY2022. This is undoubtedly a large premium where many things need to go right to justify this valuation.
However, if we compare DocuSign with other crowd favorite SaaS stocks, such as Okta (OKTA), which trades at 25x CY 2022, or Datadog (DDOG), which trades at 31x CY 2022, I believe that DocuSign doesn’t appear to be all that shocking.
What’s more, DocuSign has higher GAAP gross profit margins than Okta, making DocuSign’s revenues more attractive. Also, it trades meaningfully cheaper than Datadog despite reporting similar growth rates.
Bottom Line
SaaS stocks are trading very expensively, and they are being traded around the narrative that their business models are accelerating in this “new era” of rapid digitalization. I’m unsure whether last week’s sell-off will continue or not. But I do believe that DocuSign is a very attractive opportunity.
Investor sentiment is fickle, but as have I alluded to throughout, DocuSign has very strong visibility ahead, in an environment where many companies are struggling for growth and are being marked by very poor visibility.
In sum, I believe that its valuation is justified, and that DocuSign is compelling enough to be added to a diversified portfolio.
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Disclosure: I am/we are long DOCU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
