By Goran Damchevski
This article was originally published on Simply Wall St News
DocuSign, Inc. (NASDAQ:DOCU) is one of the rare companies that seek to disrupt the way we enter legal contracts. Part of any contract is the proof of agreement between two or more parties - this is where DocuSign comes in. The company seeks to cut time and costs for customers that want to enter legal agreements, which is a great business model because many entrepreneurs need clarity, reliability and stability of their contracts.
The company is still in the young growth phase of its development, and it will take some time for them to mature their business model. This can be great, as it is highly likely that DocuSign will be something different in a few years and possibly offer more services to users that need to streamline their contracts.
For a company at this stage in its development, there are certain catalysts that are important for investors. Validating their business model is arguably one of the most influential ones, and companies do this by proving that they can be profitable.
Profitability gives us the means to valuate the business and see what a stock is actually worth based on its money-making capacity.
As you can see in the chart below, analysts predict that DocuSign will become profitable (on a Net Income and EPS basis) in some 2 years. The first time a company posts positive EPS and profits is arguably a price moving event, and a legitimate signal of business model validation.
However, there is one more aspect to consider. When we invest in a stock, we are eligible to get a portion of the free cash flows - not profits. The free cash flows are arguably a much better measure of profitability, as they denote what is left over for both debt and equity investors.
The good news is that DocuSign has been free cash flow positive for quite some time now. In fact, the cash flows are mature enough that we can infer a lower bound for the profitability margin. As one would expect, DocuSign has a tech-level of FCF margin, which is currently at 21.4%.
As revenues grow, it is estimated that the margin will grow along with them in the next few years. This is why the company is so appealing to investors, as it is both a disruptor and a high margin business.
Now that we have a sense of the level of cash flows and the direction of future growth, we can start building a model to value the business.
At SWS, we use a mix of assumptions and analyst estimates to value a business. For DocuSign, it seems that the cash flows might be significantly undervalued, and our model estimates the company to be worth US$36.2b or US$183 per share. This is a significant 38% gap between intrinsic value and where the stock is trading today.
Now we will also review what analysts forecast for the stock.
After the latest results, the 21 analysts covering DocuSign are now predicting revenues of US$2.62b in 2023. If met, this would reflect a huge 34% improvement in sales compared to the last 12 months. The loss per share is expected to greatly reduce in the near future, narrowing 58% to US$0.24.
The consensus price target was unchanged at US$200, suggesting that the business - losses and all - is executing in line with estimates. It could also be instructive to look at the range of analyst estimates, to evaluate how different the outlier opinions are from the mean. Currently, the most bullish analyst values DocuSign at US$307 per share, while the most bearish prices it at US$160.
The Bottom Line
DocuSign is a high risk but interesting stock in the space of digital contracts.
Even though the stock is not profitable on a per-share basis, we can see that cash flows have been positive for some time, and it is likely that they will pull profits up in the future.
The business is still developing, and we can expect to see more integrations with other platforms, as well as a widening of offered services.
This may be an appealing stock for investors looking for young disruptors, and may prove to be a worthwhile long-term investment. Note that the stock is risky, and volatility swings are still expected! We've identified 2 warning signs with DocuSign, and understanding these should be part of your investment process.
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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.