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Private equity buyers are interested in tech companies that have slowed down and been placed into the penalty bucket. And Potential rumorsThe main ingredient behind DocuSign’s (NASDAQ:DOCUMENTRecent recoveryThe stock has risen by more than 40% since November 1.
Though M&A talk is the main catalyst for Investors have many reasons to be focused on DocuSign right now. DocuSign’s fundamentals. Even without a purchase offer, I still think DocuSign’s valuation is still solid, and I would invest in this company if it was growing at a reasonable cost in a market that has been expensive this year.
Buyout or not? The bull case for DocuSign is still bright
Last time I wrote a Very bullish articleThe following are some of the most effective ways to improve your own effectiveness. DocuSign in September, when the stock was trading closer to $50 per share and before a true M&A frenzy had really kicked in. Since then, it has enjoyed a rumor driven recovery rally. As such, I am dropping my rating for the company to just bullish I am still holding on to this stock in hopes of further gains.
This is the basic idea: no one can predict the future. Even if DocuSign buys out, DocuSign is a standalone company, and I see many reasons why the stock is a good buy at its current price. Here are my top reasons to be bullish about DocuSign, excluding the possibility of a takeover. DocuSign:
- E-sign is the industry leader. Remote work has shown how dependent we are upon digital technology to facilitate everything. Many sectors of the industry are still stuck with legacy processes. Meanwhile, giant industries like real estate and health care remain ripe to be disrupted by technology. DocuSign, therefore, still enjoys a huge market for its electronic agreement products. Gartner, the world’s most influential software reviewer, has also named DocuSign as an industry leader.
- Enterprise focus. Although churn is concentrated more among smaller clients DocuSign’s renewal and expansion base is derived from the fact that it continues to sign major companies.
- Customer diversification.DocuSign has a “horizontal” product that can be used in any industry. No functional changes are required to the product. DocuSign only had 400k users at the time of its IPO, in 2018. Today, this number has more that tripled, to more than 1.3million, demonstrating the strength of DocuSign’s go-to market expansion.
- $50 billion TAMDocuSign is addressing a $25 billion market in pure eSign and an additional $25 million market for add-ons. This means that the company’s $3 billion revenues have only achieved a single-digit percentage penetration into this market.
- Rich margins are the key to scalability.DocuSign boasts 80%+ gross margins pro forma, which is among the highest in enterprise software. This allows significant operating leverage as the company grows. It also generates FCF margins of 30%+.
There are risks involved, of course. DocuSign’s billings are down and its growth rate is paling in comparison with similar-sized competitors (Adobe’s (ADBEDocument Cloud is still growing at double-digit rates). This market is, in my opinion, a commoditized one. DocuSign is still a well-oiled machine for sales and marketing that can capture greenfield opportunities in a wide, multi-billion dollar market.
The next major catalyst is not an acquisition announcement. DocuSign is a digital signature service. Q4 earnings releasedEarly March is expected.
Growing profitability offsets slower growth
The main issue investors have with DocuSign’s growth rates have slowed, and this trend has continued in its third-quarter results. But in my opinion, we aren’t giving up. DocuSign is not given enough credit for the wide expansion of its margins that has led to a healthy free cashflow. In the end, it is that profitability that attracts PE buyers. DocuSign’s door.
As shown in this chart, DocuSign grew by 9% y/y to $700m in Q3, but that was still ahead of Wall Street expectations of $690m (+7% y/y). It took only a year for DocuSign growth will drop from high teens to low single digits.
The billings growth rate is also showing a similar trend. This is because, as experienced software investors know well, this is the best indicator for a subscription business’s growth trajectory. The trailing twelve-month growth in billings also slowed down three points q/q, to 9%. This does suggest that revenue growth could stabilize around 9% as billings and growth rates are now in line.
A slowdown in the expansion trend is one of our main concerns. Net revenue retention rates in the quarter dropped to a new record low of 100 percent – meaning that seat expansions and upsells have been completely offset by customer churn. This was due to an extended macro-driven decrease in enterprise budgets.
The good news DocuSign’s net retention rates are expected to increase, but the company is expecting signs of stabilization. You can also read more about it here In Q4 before they improve. Blake Grayson, CFO, stated that the Q3 earnings call:
As expected, expansion headwinds continued impacting year-over-year growth in billings. This dynamic is also evident in our dollar net retainment, which was at 100% in Q3. Spending optimization and IT budget scrutiny continue to temper expansion rates. We expect dollar-net retention to continue to decline in Q4.
This quarter’s results have shown us some encouraging data. First, we saw an improvement or stabilization of consumption in several verticals such as business services, technology, and insurance. […]
Second, our early progress in the omnichannel Go-to-Market efforts is pleasing. “Our direct sales efforts drove the enterprise segment to show some early potential compared to previous quarters’ performance.”
Profitability has soared dramatically. The company has reduced its workforce by 10% since mid-last-year. The pro forma operating margins in Q3 increased by four points from the 23% of Q3 last year:
Then, there’s also that. The year-to-date (through Q3) cash flow has more than doubled, with a free cashflow of $639 millions. DocuSign’s growth may not be as rapid as it was in the early days, but with a gross margin of 80%+ and an opex that is very elastic, they are still generating enviable profits.
Value and key takeaways
At current share prices near $58, DocuSign is valued at $11.85 Billion, after subtracting its $1.65 Billion in cash and $0.69 Billion in debt. DocuSign is a result of DocuSign The enterprise value is $10.89 trillion.
The next fiscal year (the year for Wall Street analysts expect DocuSign to end in January 2025 DocuSign will generate $2.91 billion or 6% revenue growth y/y.
There are several reasons why this outlook could be conservative. Comparing FY25 to a macro-impacted and very rough FY24. As enterprise budgets recover, so too might DocuSign’s invoices – we could see a reversion of seat expansion trends in the enterprise. The momentum of international sales may also be a factor in boosting revenue growth.
Just taking the consensus estimates as they are, DocuSign Trades are just 3.7x EV/FY25 revenue. If we apply DocuSign’s FY25 FCF would be 902 million dollars based on the YTD FCF margin of 31%. DocuSign’s cash flow multiplier is just 12.1x EV/FY25 FCF.
It’s not surprising that PE firms are sniffing at these prices DocuSign’s porch. The stock is still at modest multiples despite the acquisition rumors (and I would be willing to stay invested in this company at these prices too). I recommend buying before more news hits the headlines.