By now, you’ve probably noticed that, in this extraordinary time, it’s not just the traditional recession-proof industries like consumer staples that are getting investor attention. Because of the COVID-19 pandemic, the ways many people live and work have changed, and the technology companies that enable these changes have become hot investments.
Check out DocuSign Inc (NASDAQ:DOCU), for instance.
The San Francisco-based company is known for its “eSignature” solution, which allows different parties to securely sign agreements without having to be in the same room. In an era where people are practicing social distancing, DocuSign’s service comes in quite handy.
In fact, there are hundreds of millions of people who use the company’s eSignature solution around the world, including approximately 749,000 paying customers coming from a wide range of industries.
To give you an idea, DocuSign now serves 18 of the top 20 global pharmaceutical companies, 10 of the top 15 global financial services firms, and seven of the top 10 global tech companies. (Source: “Corporate Profile,” DocuSign Inc, last accessed October 22, 2020.)
As you’d expect, the company’s business prospered during the pandemic.
According to the latest earnings report, DocuSign generated $342.2 million in total revenue in the second quarter of its fiscal year 2021, which ended July 31, 2020. The amount represented a 45% increase year-over-year. (Source: “DocuSign Announces Second Quarter Fiscal 2021 Financial Results,” DocuSign Inc, September 3, 2020.)
Billings, a critical performance metric for a software services firm, totaled $405.7 million for the quarter, marking a 61% increase from a year ago. Billings measure sales to new customers plus subscription renewals and additional sales to existing customers. Strong billings growth suggests that business was indeed doing well at DocuSign.
Another thing worth noting is that DocuSign runs a recurring business, with subscription revenue accounting for 95% of its total revenue in the most recent fiscal quarter. Moreover, the dollar weighted average contract length is 17 months for DocuSign. This should provide strong revenue visibility going forward. (Source: “Q2 Fiscal Year 2021 Financial Review,” DocuSign Inc, last accessed October 22, 2020.)
The company is gaining more a lot more customers, too. As I mentioned earlier, DocuSign has roughly 749,000 paying customers. Well, this number represented a 39% increase from the 537,000 customers it had a year ago.
Better yet, the growth in big spenders has been particularly strong: the number of enterprise and commercial DocuSign customers rose by 55% year-over-year in the most recent fiscal quarter.
Another thing that makes DOCU stock stands out is DocuSign’s ability to generate cash.
If you’ve been following the tech sector, you’d know that some businesses are burning through cash as they produce growth. But in the case of DocuSign Inc, the expansion in its business has actually allowed it to generate a lot more cash.
In the company’s fiscal 2021 second quarter, it generated $99.8 million in free cash flow, which marked a staggering 738.7% increase from the $11.9 million generated in the year-ago period.
Of course, one major factor behind the boost in demand for DocuSign’s solutions was that people have not been meeting face to face as often as before because of the pandemic. In other words, once COVID-19 is no longer a threat, the growth momentum in the company’s business may not be as strong as before.
In fact, during a virtual conference last month, DocuSign’s chief executive officer said, “…whatever the new normal is, I think, we will have an increased demand from what we had prior, but I don’t know that it’d sustain. If you look at the guidance we’ve given for the second half of this year, it’s not at the same rate of billings growth or revenue growth we had in the first half, because that was unusually heightened demand.” (Source: “DocuSign, Inc. (DOCU) CEO Dan Springer Presents at Jefferies Virtual Software Conference (Transcript),” Seeking Alpha, September 15, 2020.)
For full fiscal year 2021, management expects DocuSign Inc to generate $1.384 to $1.388 billion in revenue and $1.623 billion to $1.643 billion in billings. Considering that the company’s fiscal 2020 revenue and billings were $974.0 million and $1.1 billion, respectively, reaching the guidance range would still translate to substantial improvements.
In other words, DocuSign is projected to continue growing its business; it’s the rate of growth that might slow down in the post-pandemic environment.
DocuSign Inc (NASDAQ:DOCU) Stock Chart
Chart courtesy of StockCharts.com
As you can see from the chart, DocuSign stock has shot through the roof, returning a whopping 188% year to date.
And remember, the company’s solutions aren’t only useful during a pandemic: DocuSign can eliminate the paper-based agreement process, allowing much faster turnaround times. Companies across industries have already incorporated DocuSign into their workflow, and retention rates should be strong. While soaring tickers aren’t usually the safest bets, DOCU stock could be a worthy tech play for the long term.