DocuSign: AI Monetization & New Growth Opportunities Are Here – Reiterate Buy (DOCU)

We previously covered DocuSign, Inc. (NASDAQ:NASDAQ:DOCU) in April 2024, discussing the growing bullish support observed in its stock performance, particularly attributed to its sticky consumer base and strategic partnerships across different platforms.

Combined with the $50B in untapped global TAM and sustained cost optimization, we had reiterated our Buy rating then.

Author’s Historical Rating

Since then, DOCU has lost -11.3% of its value as the wide market recovers by +5.1%, otherwise, by +29.6% and +25.8% since our first Buy rating in the October 2023 bottom, respectively.

Even so, we are reiterating our Buy rating here, with the recent pullback triggering an improved upside potential as the management reports double beat FQ1’25 earnings call while raising their FY2025 guidance on June 06, 2024.

Combined with the improving Dollar Net Retention [DNR] rate, stable gross margins/ Remaining Performance Obligation [RPO], and growing AI monetization opportunities, we maintain our confidence in DOCU’s ability to deliver profitable growth ahead.

DOCU’s Hyper Pandemic Investment Thesis Is Well Behind Us

DOCU 6Y Stock Price

With DOCU already losing -82.2% of its market cap since the peak recorded during the hyper-pandemic period, it is apparent that the same volatility has also been observed with other pandemic-era winner stocks.

The list includes Zoom (ZM) at -88.7%, Teladoc (TDOC) at -96.1%, and Peloton (PTON) at -97.2%, implying that the correction is a market wide event as the overly exuberant sentiment moderates and the market moves on to the next hype, currently being generative AI.

Even so, we believe that DOCU continues to offer a viable investment thesis, based on the double beat FQ1’25 earnings call with total revenues of $709.6M (-0.3% QoQ/ +7.2% YoY) and adj EPS of $0.82 (+7.8% QoQ/ +13.8% YoY).

Most importantly, its DNR rate improves to 99% (+1 points QoQ/ -6 YoY), with the QoQ improvements well reversing the consistent decline since the peak DNR of 125% observed in FQ1’22.

The same stabilization is also observed in its multi-year RPO at $2.2B (inline QoQ/ +22.2% YoY), with the increasingly sticky SaaS offerings triggering improved insights into its near-term top/ bottom lines.

At the same time, DOCU remains highly focused on generating growth, as observed in the recently closed Lexion acquisition worth $165M, with the latter’s AI-powered agreement management software building upon the former’s existing capabilities in the Intelligent Agreement Management [IAM] market.

This is on top of the newly launched Docusign IAM platform in April 2024, with the aim of the generating “collaborative, automated, and integrated agreements” through Docusign AI and its partners, including HubSpot (HUBS), Salesforce (CRM), ServiceNow (NOW), Quik!, Stripe, Google Drive (GOOG)/ Microsoft OneDrive (MSFT), and Prisidio, amongst others.

The management also highlights the possibility of creating “flexible, customizable agreement workflows,” while offering new IAM SaaS segments for different target audiences from September 2024 onwards.

Perhaps this is why the DOCU management feels comfortable to raise their FY2025 revenue guidance from the $2.915B offered in the FQ4’25 earnings call (+5.6% YoY) to $2.926B (+6% YoY) in the recent FQ1’25 earnings call, implying the management’s ability to pull multiple levers to generate improved growth prospects.

Combined with the robust LTM Free Cash Margins of 32.2% (+14.1 points sequentially) and the net cash position on balance sheet at $1.08B (+3.8% QoQ/ -16.2% YoY), we believe that the company will able to sustainably finance their growth ambitions ahead.

Anyone concerned about the YoY reduction in DOCU’s cash position may also want to note that it is partly attributed to the management’s sustained share repurchases (with the all-cash Lexion acquisition only recently completed in May 31, 2024), with the recent raise bringing its remaining repurchase authorization to $1.14B.

Impressive indeed.

So, Is DOCU Stock A Buy, Sell, or Hold?

DOCU 2Y Stock Price

For now, DOCU has lost most of its 2024 gains and is trading near to its 200 day moving averages, while appearing to retest its previous resistance levels of $52s after bouncing off the robust 2024 support levels of $50s

For context, we had offered a fair value estimate of $55.90 in our last article, based on the FY2024 adj EPS of $2.98 and the FWD P/E of 18.77x (near to its 1Y P/E mean of 18.69x). This is on top of the long-term price target of $70, based on the consensus FY2027 adj EPS estimates of $3.73.

The Consensus Forward Estimates

Combined with the raised FY2024 guidance, it is unsurprising then, that the consensus have raised their forward estimates, with DOCU expected to chart an improved top/ bottom line growth at a CAGR of +6.8%/ +8.9% through FY2027.

This is compared to the original estimates of +5.1%/ +2.8%, though naturally impacted from the +31.6%/ +101.4% observed between FY2019 and FY2024, respectively.

Even so, with pandemic well behind us, we believe that it is foolish to look at the rearview mirror, especially since demand for DOCU’s offerings remain robust with its financial performance still profitable, as discussed above.

These developments also result in the moderate upgrade in our long-term price target to $72.20, based on the raised consensus FY2027 adj EPS estimates of $3.85 (+3.2% from the previous estimates of $3.73), with the recent pullback naturally triggering an improved upside potential of +36.8%.

As a result of the still attractive risk/ reward ratio at current levels, we are maintaining our Buy rating for the DOCU stock.