DocuSign Inc. (DOCU, Financial) has revolutionized the way businesses handle agreements, transitioning from paper-based processes to electronic signatures. Founded in 2003 by Tom Gonser, the Seattle-based company's journey began with the launch of its first software-as-a-service platform in 2004, enabling electronic document signing and laying the groundwork for its future growth.

From 2010 to 2015, the software company experienced significant expansion. In 2010, DocuSign secured substantial venture capital, accelerating its growth and broadening its market reach. Between 2011 and 2012, the company expanded internationally, establishing offices in London and growing its global customer base. In 2013, it introduced the DocuSign Global Trust Network, providing secure and compliant electronic signatures worldwide. By 2018, DocuSign debuted on the Nasdaq, raising over $629 million in its initial public offering.

The Covid-19 pandemic in 2020-21 significantly boosted DocuSign's business as organizations increasingly relied on electronic signature solutions for remote work. This period of heightened demand drove impressive growth, with the company becoming a "poster child" growth stock, achieving 45% growth in 2022 and 49% in 2021.

However, the post-pandemic period has seen a sharp correction in its market cap, which has dropped by 82.20% from its peak. This volatility mirrors trends seen in other pandemic-era winners like Zoom (ZM, Financial) (down 88.7%), Teladoc (TDOC, Financial) (down 96.1%) and Peloton (PTON, Financial) (down 97.2%), suggesting a market-wide adjustment as investor sentiment shifts towards new trends, such as generative artificial intelligence.

Despite the correction, DocuSign remains a vital tool for industries that require extensive document processing, significantly enhancing efficiency. The initial surge during the pandemic, driven by the work-from-home trend, highlighted the importance of electronic signatures and remote agreement solutions. Although the company's valuation has moderated, I believe it is well-positioned to return to attractive growth levels, driven by ongoing innovations and the push towards AI-enhanced agreement processes. DocuSign continues to add new features and integrations, focusing on improving the entire agreement process, positioning itself for long-term growth and relevance in an increasingly digital world.

Dominance in the electronic signature market

DocuSign commands an impressive 67% market share in the electronic signature market, according to Statista. This dominance is significant in an industry projected to grow at a 26.70% compound annual rate by 2030, driven by the increased adoption of digital processes and remote working models across various sectors such as legal, finance, real estate and health care.

The company's strategic collaborations with leading software providers further solidify its market position. For example, its partnership with Salesforce (CRM, Financial), the leader in customer relationship management software, helps streamline routine operations for Salesforce users. Additionally, DocuSign's solutions integrate seamlessly with Microsoft (MSFT, Financial) Teams, which boasts over 300 million users. The company also integrated WhatsApp delivery with Meta (META, Financial) last year, leveraging one of the most preferred communication channels globally. These collaborations and integrations cement DocuSign's leading position and provide a solid foundation for future growth.

Source: DocuSign

Intelligent agreement management

Since 2018, DocuSign has been leveraging artificial intelligence to revolutionize how businesses handle contracts, moving beyond basic electronic signatures to incorporate intelligent features that automate and optimize the contract process.

In April, the company launched its Intelligent Agreement Management (IAM) platform, aimed at generating collaborative, automated and integrated agreements through DocuSign AI and partnerships with companies like HubSpot (HUBS, Financial) and Salesforce. IAM consolidates the company's standalone products, including e-signature, Contract Lifecycle Management and DocuSign Maestro, into a unified platform. This launch is a significant milestone for DocuSign as it expands its addressable market, enhances sales productivity and improves corporate margins. By developing IAM tailored for specific verticals such as customer experience, sales, legal and procurement, DocuSign is strategically positioning itself to add substantial value for enterprise customers and drive future growth.

Source: DocuSign

Strategic acquisition of Lexion

DocuSign continues to focus on generating growth through strategic acquisitions, as evidenced by its recent acquisition of Lexion for $165 million. Lexion's AI-powered agreement management software enhances DocuSign's existing capabilities in the IAM market. This acquisition aligns with its expansion into AI, benefiting its over 1.5 million customers. Further, Lexion's API integrates with key business platforms, accelerating the contract review process by up to 80% and providing AI-powered assistance for drafting contracts.

This acquisition is expected to have a material impact on DocuSign's revenue and margins in the long term, opening new market opportunities in contract lifecycle management—a sector demanding advanced technological integration. It also highlights DocuSign's commitment to innovation and growth, recognized by private equity firms like Bain Capital, which see untapped potential in the company's value and future prospects.

Financial overview

In the first quarter of fiscal 2025, DocuSign marginally surpassed both revenue and non-GAAP earnings per share consensus estimates, but provided a cautious outlook. The company generated $710 million in revenue, reflecting a year-over-year growth rate of 7%. However, this marked the fourth consecutive quarter of revenue deceleration for the software company over the past year.

Source: DocuSign

On a positive note, DocuSign's customer base continues to grow, reaching 1.56 million customers, an 11% increase year over year. Despite this growth, there are revenue risks for the company, reflected in its slowing top-line growth, especially post-pandemic. A key challenge is existing customers are spending less on the platform. This is evident in DocuSign's dollar net retention rate, which measures organic revenue growth.

Further, DocuSign's dollar-based net retention rate increased to 99% (up one point quarter over quarter, but down six points year over year), showing a stabilization after a consistent decline from a peak of 125% in the first quarter of 2022. Additionally, the multiyear remaining performance obligation remained steady at $2.20 billion (up 22.20% year over year), indicating increasing stickiness of its SaaS offerings.

Source: DocuSign

Management has raised its 2025 revenue guidance from $2.90 billion (up 5.60% year over year) to $2.90 billion (up 6%), suggesting their ability to drive improved growth prospects. While I anticipate DocuSign's growth will continue to normalize, I remain optimistic about its growth in adjacent areas and its IAM platform. I expect the renewal of existing customers to contribute 4% growth to the top line based on historical billing growth. Additionally, I foresee another 2% growth from adjacent businesses such as contract lifecycle management, notary services and the recently launched IAM platform.

DocuSign is a highly profitable software company, generating $232 million in free cash flow in the last quarter. Despite facing downward pressure on revenue growth and net retention rate, the company maintained a robust free cash flow margin, retaining 33 cents for every dollar of revenue in the first fiscal quarter. Although the free cash flow margin remained relatively stable year over year, DocuSign achieved an 8% year-over-year increase in free cash flow. With strong last 12 months free cash margins of 32.20% (up 14.10 points sequentially) and a net cash position on the balance sheet of $1.10 billion (up 3.80% quarter over quarter, but down 16.20% year over year), I believe DocuSign is well-positioned to finance its growth ambitions sustainably.

Source: DocuSign

Concerns about the year-over-year reduction in DocuSign's cash position should be tempered by recognizing management's sustained share repurchases and the all-cash Lexion acquisition completed on May 31. The recent raise brought the company's remaining repurchase authorization to $1.10 billion. Looking forward, the company is expected to produce $1.10 billion to $1.50 billion in free cash flow over the next 12 months, with $1.10 billion generated over the trailing 12 months. From a free cash flow perspective, DocuSign appears attractively valued.

Valuation

DocuSign's shares are currently valued at a price-sales ratio of 4, significantly below the company's long-term average of 8. This valuation was particularly high during the pandemic, but as top-line growth has slowed, investors have re-evaluated DocuSign's valuation metrics.

By comparison, other software companies like Adobe (ADBE, Financial) and Oracle (ORCL, Financial) have much higher valuation ratios. These companies benefit from longer operating histories, profitability on a net income basis and faster growth rates. However, DocuSign's growth potential as perceived by the market has improved, with consensus estimates forecasting an improved CAGR of 6.80% for revenue and 8.90% for earnings through fiscal 2027.

Given DocuSign's dominant market position and ongoing innovations, I believe its shares could eventually trade at the industry average price-sales ratio of 6.50. The company continues to lead the electronic signature market without significant threats to its dominance and is expanding its product offerings by integrating new features and enhancing the entire agreement process.

Additionally, the company's strong customer base, including major clients like Meta, Salesforce and Microsoft, offers substantial upselling opportunities for any new features and integrations.

With the pandemic behind us, it is unwise to rely on past metrics. Demand for DocuSign's services remains robust and its financial performance is still profitable, as discussed previously. The recent pullback following the earnings release has created an improved upside potential. Using a target price-sales ratio of 6.50 in the long term, shares could have a fair value of up to $90, yielding a significant upside potential of 65% from current price levels.

Source: valueinvesting.io

A discounted cash flow valuation based on a five-year Ebitda multiple using a 7.7% discount rate also supports this trend. According to this model, DocuSign's stock appears undervalued with an intrinsic value of $63 per share, suggesting about 18% upside from current levels. This further underscores the potential attractiveness of the stock.

In addition to its appealing valuation, I believe DocuSign is positioned for long-term growth and will become a standard in business operations, pandemic or not. E-signatures have significantly improved business efficiency and reduced necessary work hours, arguably more so than artificial intelligence to date. While competition will undoubtedly exist, DocuSign's total addressable market is likely much larger than its current revenue. As a result, the attractive risk-reward ratio at current levels leads me to maintain a buy rating for the stock.

Conclusion

DocuSign has faced significant volatility since its pandemic-driven peak, yet it continues to hold a dominant position in the electronic signature market. The company's strategic innovations, such as the IAM platform and the acquisition of Lexion, position it well for future growth. While competition exists, the compnay's robust financial health and market leadership provide a solid foundation for long-term value. The current undervaluation offers a compelling opportunity. As digital transformation continues, DocuSign is set to remain a key player in streamlining agreement processes worldwide.