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Investment Thesis
I’m optimistic heading into the earnings release on Thursday. DocuSign Inc. (Nasdaq:documentaryThe company has established its leadership position despite recent weakness in its stock price and earnings. position Electronically The company has been growing in the signature and contract management sector over the past few years, and has leveraged its work-from-home policies to accelerate growth, especially during the COVID-19 pandemic.
Post-COVID, they are now Aggressive The company is expanding its product portfolio through its intelligent contract management platform and the integration of generative AI across its products to streamline complex contract/contract compliance workflows. The integration of capabilities such as enterprise search within the platform allows address It solves key pain points in contract management and reduces reliance on extensive and expensive legal consultations and manual contract reviews.
The company’s recent $165 million Acquisition Lexion further expands AI capabilities to secure new markets The opportunity in contract lifecycle management is an area where greater technology integration is needed. Even private equity firms like Bain Capital and Hellman & Friedman are looking to Recognized The company had been exploring acquisitions over the winter and sees untapped value and growth potential in the company.
I don’t think the market is fully aware of how the software layer of the AI revolution can help in this area. Exposure Weaknesses in contract lifecycle management became apparent, and companies quickly realized that significant value and potential revenue was being lost due to inefficiencies in post-signature management, compliance monitoring, change management, and online performance evaluation.
Despite the fall in stock prices 73% Compared to its peak, I believe the company’s financial situation is still good. The company’s revenue is $2.76 billion We have turned last year’s deficit into a profit. Future profits are key, and our forecasted profits are $707.71 In the most recent quarter, it was $1 million.
I believe DocuSign’s AI-driven innovation will put the company in a more confident position in the industry, which I believe will lead to higher stock prices. I believe earnings will show this. In my opinion, DocuSign, Inc. stock is worth buying.
background
DocuSign’s stock price has fallen by more than 73% over the past three years. Belong The company initially saw a surge in demand and stock price growth during the early stages of the COVID-19 pandemic, when many businesses adopted digital solutions to facilitate remote work, as the post-pandemic business environment normalized and the company’s revenue growth slowed. Increased reliance on digital document management has caused the company’s stock price to more than triple from pre-COVID-19 levels by 2021.
However, as pandemic restrictions eased and businesses adapted to new norms, these growth rates became unsustainable. In its fourth-quarter fiscal 2024 report, the company projected revenue growth of around 8% YoYThis was significantly lower than the pandemic-era growth rate.
To meet industry demand, DocuSign use Since 2018, DocuSign has been leveraging AI to transform the way businesses handle contracts from creation to management to compliance. It goes beyond basic e-signatures to incorporate intelligent features that automate and optimize the contract signing process. AI-driven capabilities allow for automatic tagging of dynamic fields in contracts, significantly speeding up the preparation and signing process. DocuSign claims that contracts are created with precision, reducing the chance of errors and the need for rework, speeding up contract creation. cycle From drafting to execution.
As a result, the electronic signature app market is expected to grow at a compound annual growth rate (CAGR) of 36.1% By 2030, various industries including law, finance, real estate and healthcare are expected to see increased adoption of digital processes and remote work models, a trend that will intensify as many in these sectors return to the office.
Companies are realizing that digital contract management software will remain important in the post-COVID environment.
Software companies are under pressure
In Salesforce’s recent earnings report, Slow down Slowing software sales growth has prompted increased scrutiny from investors who are increasingly concerned about profitability across the enterprise software industry. The company has faced pressure from activist investors to cut costs and improve margins that have been overlooked in favor of rapid expansion. The reaction to Salesforce’s earnings has sent ripple effects across the software sector, with analysts reassessing their growth prospects amid rising interest rates and more conservative corporate spending. In particular, software companies that have yet to demonstrate consistent profitability are reassessing their position.
In my opinion, Salesforce’s revenue impact is now a bellwether for the industry, with companies gradually adjusting their plans in response to investor expectations. These companies appear to have lost the high-margin aspects of their business models in an environment where AI makes coding easier and rising GPU costs drive up capital expenditure costs. High-performance AI models, especially those that involve coding, require massive computational power that requires expensive GPU-based hardware or cloud services. Therefore, these companies require higher capital expenditures to invest in hardware or expand their use of cloud-based AI services.
However, many of these software companies The AI Arms Race This puts a strain on resources and focus, and puts you at risk of being left behind. In fact, AI code assistants, for example, Be expected It is expected that AI will be used by three-quarters of enterprise software engineers by 2028, up from just 10% in 2023. To succeed in this race, we believe that financial investment in AI technology, new business models, and integration and operational practices are essential. maximize While the benefits of AI are necessary, they could jeopardize other profit-driven initiatives.
DocuSign is a True AI Company
The global contract management software market size is estimated to reach $965.25 billion in 2021. This is due to the fact that arrival It will reach $2.94 trillion by 2030, growing at a CAGR of 13.2% during the forecast period.
The value of AI in contract management is significant, to say the least. Recent research shows: the study According to DocuSign, contract management is estimated to cost businesses around $2 trillion (per year!) worldwide, highlighting the huge financial burden that inefficient contract management processes place on businesses. Add to this the costs associated with legal services. Contract lawyers range It’s a big increase, hovering in the range of $300 to $1,000 per hour, and for more comprehensive services like drafting and negotiation, it can go even higher, reaching $3,000 per hour. Considering that companies are already spending more than $100 per hour, $500 Given the hourly cost of a lawyer, it’s no wonder firms are turning to AI to cut costs.
So there is huge potential for AI in the coming years. McKinsey says that AI systems are currently Trained Identifying and flagging high-risk clauses in contracts before they become an issue can prevent future disputes and legal challenges and improve compliance with relevant laws and regulations. Businesses will also find greater value in AI’s ability to analyze and compare contract terms across vast data sets to drive better negotiation outcomes. To that end, DocuSign announced earlier this year that it will use user data to: train Their AI model. I think this is one of the most visible cases of AI integration. DocuSign has a clear value proposition here.
Revenue Forecast
DocuSign is scheduled to report its fiscal first quarter 2025 financial results, with an after-market release scheduled for June 6. Market participants and analysts are projecting the EPS to be as follows: $0.79 The quarter is expected to register year-over-year growth of 9.92%. Note that growth is accelerating from 8% year-over-year growth in the fourth quarter of fiscal 2024.
The company reported EPS of $0.76, beating expectations by $0.11, for the fourth quarter of 2024. The report also highlighted that quarterly revenue increased 8.01% year over year to $712.39 million.
Of particular note during the company’s fourth quarter 2024 earnings call was its focus on AI-driven innovation in contract auditing and management. DocuSign CEO Alan Thygesen announced:
We are encouraged by the momentum across the business…organizations large and small continue to invest in DocuSign’s value proposition -Q4 call.
I think AI will accelerate this.
I look forward to hearing more about DocuSign’s AI integration into their current offering on the call tomorrow. Given the significant costs associated with traditional contract management and the high cost of legal services for contract review, their solution now presents a compelling value proposition. Given the clear value proposition (in my opinion), I am excited to see enterprise adoption.
evaluation
DocuSign’s non-GAAP P/E ratio is 16.40below the sector median of 23.50. If their future EPS were to converge to the sector median, this would imply an upside of about 43.3% from current levels. Their expected earnings growth rate is 9.78% Year-over-year, this is significantly higher than the industry average revenue growth of 3.07%.
In addition to traditional valuation metrics, there have been discussions regarding potential acquisition offers for DocuSign (as noted in the Investment Thesis section). While these talks have reportedly stalled, the speculative interest highlights the inherent value perceived in the company’s offering and market position.
risk
The biggest risk, of course, is growth. DocuSign’s growth has moderated since its pandemic-era boom. The company reported 9.8% year-over-year revenue growth for fiscal 2024, Slowed down Compared to previous periods when double-digit growth was the norm, many technology companies have struggled with broader post-pandemic trends after a surge in demand for remote and digital solutions normalized.
The company Reorganization The company’s efforts to improve growth have not yet fully convinced the market that they are effective, and the stock price has fallen by over 73% as mentioned earlier. The stock price has reacted negatively to the news that acquisition talks have stalled. I believe this is due to the market’s fading expectations about the company’s prospects for operating independently. I believe this is a misjudgment.
Finally, while AI can be confusing, it can also misinterpret complex legal language or fail to recognize context-dependent clauses. These costly errors could mean serious legal consequences for DocuSign’s clients. As pointed out, inaccuracies in execution or results can lead to unfortunate outcomes. resultThis includes potential violations of privacy laws and the unintentional embedding of discriminatory practices within AI algorithms, which we have seen in other areas where AI is having unintended consequences. prejudice.
So I think the value proposition is clear: Previously, a quick contract check involved the tedious task of skimming the document looking for key phrases and then re-reading the language. As long as DocuSign states that their tool does not provide legal advice, but simply guides users who would previously have skimmed documents to the right place, I think customers will see it as an added value and won’t risk over-relying on it.
Conclusion
On the way to the bottom line, I think DocuSign is doing a good job of extending its capabilities beyond digital signatures to comprehensive contract lifecycle management by adopting AI-driven solutions.
The introduction of AI in contract auditing introduces new risks, but these are offset by the rigorous safeguards the company has put in place. As businesses look to reduce costs through automation, DocuSign’s solution offers a timely value proposition and we believe the stock is a good buy.
