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$DOCU

Docusign

  • Electronic signature solutions, >50% market share with 900 integrations, with 85% of their business out of the US.
  • Signature market expected to grow at a shocking >30% per year through 2030 per some analysts.
  • Adobe best known competitor at just over 10% market share.

Financials:

  • 17.8B MC, 16.95 EV, 960M cash and equivalents, 124M debt.
  • Revenue growth has slowed to single digits. ~7%
  • Normalized net income still growing >100%, but absolute value is low. ~230M annual.
  • Operating cash flow looks better than it is because of stock based compensation is getting added back. ~600M in SBC this year.
  • Red flag for me when Stock Comp is >3x net income.
  • Ratios:
    • Based on above the most accurate representation is going to be EV/EBIT ~72x.
    • If using OCF or FCF you are just taking credit for all the stock based comp not being a current cash cost.
  • Shares outstanding slowly increasing, no dividend.
  • Greenblatt screen, failed: ROC 64% (great), Earnings yield 1.56% (bad).
  • Share outstanding trend (buybacks or dilution), and dividend yield.

Investment thesis:

Thesis:

Bear: On the surface, >70 multiple for company growing top line at 7-8%. Screens a bit better than it really is based on one time boost to net income (tax line), and OCF gets credit for stock based comp of >600 M.

Bull: >30% CAGR is real for signature market in total? Then, as market leader they can grow into other countries. More importantly: There is quite a lot being spent on R&D yearly. This counts as an expense on the income statement, but in many cases it can be argued this is an intangible asset in the end. Mauboussin has written extensively on this being overlooked for modern companies that do not sell tangible assets. In this case $588M would be listed as an intangible asset rather than an expense. You then amortize it 98M over 6 years. This makes Net income significantly higher than 230M; now ~800M. It would lower ROIC considerably though given the "invested capital" increase, and increase the earning yield.

This will require a deeper dive to provide true ratios accounting for this.

Investment decision: Pending

Paul Weaver

Charlotte, NC