Can DocuSign Survive Post-Covid?

DocuSign, a company providing the service of eSignatures, experienced a boom in 2020 during the pandemic. This was followed by its stock price falling in half, and concerns over the future of the company and the ramifications for investors.

The pandemic transformed life and society by changing the medium of work and communication. The emphasis on virtual technologies that can be accessed remotely is well visible with the success of corporations providing such services – such as Zoom Video Communications and Peloton Interactive.

As the demand for such services exploded, the value of their stock increased, with the companies getting greater investments, expanding market share, and generating larger profits. The story of DocuSign is similar. DocuSign, Inc. is an American company headquartered in San Francisco, California, that allows organizations to manage electronic agreements. It provides the service of eSignatures, allowing users to electronically sign documents on different devices.

Business Model of DocuSign

DocuSign produces a software solution that allows people to sign business and legal documents from a smartphone or computer. This was particularly useful for large enterprises that had to sign documents daily.

For example, banks and insurance companies posit signatures on a daily basis. A policyholder needs to sign documents for insurance claims to come through. Particularly in the pandemic, with the immense loss of life, a unique situation was created where insurance claims ran high, but the situation made it difficult for physical meetings with such companies.

In such a background, DocuSign saved the day, also helping companies cut down on expenses by eliminating travel costs. One of DocuSign’s USPs is its robust verification feature. This differentiates it from competitors. They use picture verification of government-issued IDs to check the identity and prevent fraudulent signatures.

DocuSign went public in 2018 valued at a little under 5 billion dollars. Its IPO was well received as everyone was fascinated with the new innovative software it provided and its utility of it. Their revenue grew rapidly, at a 37% CAGR even in pre-covid times. Even though the company reported operating losses in every quarter, investors overlooked it due to the impressive growth rate.

Rise of Docusign in Covid

While COVID negatively impacted most businesses and livelihoods as life came to a standstill, DocuSign experienced a boom. As employees were forced to work from home, the online signature platform they provided shifted from a convenience to a necessity.

They grew at an annualized rate of 50% between the first and third quarters of 2021. The reported operating losses almost broke even during this time period. Its stock was valued at $310 at its peak, giving it a market capitalization of $60 billion. This market cap surpasses that of household names such as Twitter and Chipotle.

Fall of DocuSign stock

On 2nd December 2021, when DocuSign released the results of their third quarter, their stock price had almost fallen in half, bringing their market cap down nearly 30 billion dollars as well. Even though they beat analysts’ expectations by generating $545 million in revenue, representing a 42% growth in year over year (comparing the same time period in successive years) for quarter 3, this growth rate was never sustainable in the first place.

The market for electronic signatures is small, and with DocuSign’s core focus on that niche, a market cap of $60 billion was absurd in the first place. It can be explained by investor behaviour during the pandemic. In the pandemic investors highly invested in any company that was benefitting from the situation, resulting in such companies becoming overvalued.

As the situation changed and life returned to normal, the high growth rates would obviously fall, as an overvalued company tends to return to its mean, negatively impacting stock price.

Total revenue growth slowed from 58% y/y in the period last year and is also just 1% higher compared to the prior Q4. Non-GAAP operating margin of 17% declined from 20% in Q1 fiscal 2022. This is partly due to ongoing investments to support new initiatives, including through a larger employee headcount. Free cash flow actually improved this quarter to $175 million, up 42% y/y based on the top-line momentum and higher billings.

For the full fiscal year 2023, a revenue target right around $2.475 billion, if confirmed, will be 17% above the result in fiscal 2022. The current guidance suggests a flat gross and operating margin compared to the latest Q1. DocuSign ended the quarter with $1.1 billion in cash, equivalents, and investments which cover the $750 million in long-term debt.

Is the stock still worth it?

As a stock that was likely highly overvalued during covid times, it was expected for the price of the stock to fall. However, this does not mean that the company is doomed. A big theme for DocuSign is the move beyond just e-signatures to an entire "agreement cloud" ecosystem. Contract Lifecycle Management (CLM) is seen as the long-term growth driver referring to all such processes.

Both before and after the initial signing, there are amendments and renewals, and other procedures and CLM takes care of this while also providing a system to track records. CLM allows customers to generate agreements and facilitates negotiation as a complete document management platform.

Although it faltered, the company still has scope for executing on its “land and expand” strategy, in which it attracts clients and then consistently sells more and more services. Others discuss that the company might be acquired by a bigger tech company such as Google, Apple, or Adobe because of the kind of software services it provides. Overall, the market is bullish on its CML potential.