Some notes here:

• Just because DOCU did very well since their IPO does not mean they will continue to do well.

• When I see this chart I ask myself “How expensive is it? How popular is it?” As it turns out, it is very expensive (not to be confused with stock price), and it is very popular. Buyer beware.

1. Current Price (as of 9/7/21)

   1. $291.51

2. Market Cap

   1. $60.9 Billion

3. 52 Week Price Range

   1. 179.49 – 314.76

4. Short Interest % (A measure of popularity. The lower the percentage, the less capital betting against DOCU).

   1. 3.62

5. Industry

   1. Software

Investment Thesis

Agreements and The Great Unbundling

We call it the ‘e-signature market’ but I don’t think that’s fitting. I think it should be called the ‘agreements’ market. Agreements need to be a regular part of life if we are to make anything substantial. It’s one of my beliefs that in the future we will see more and more boutique small businesses that cater to experiences, legal services, governmental services, and more. All of these require a signature, which the very nature of will change as well. The DOCU agreement cloud, combined with the ability to accept payments, enables people more time to create and explore on their own.

The TGFX Test

“Thank God For ____” is the test I run all businesses through. While it’s not absolutely necessary, I find all my favorite businesses have done extremely well that pass the TGFX test: Costco, Microsoft, Apple, Google, Spotify, Walmart, Amazon, etc. I never feel like they are overcharging, and if they disappeared tomorrow I would be pretty upset.

DOCU passes the TGFX test very well. Their pricing, high profit margins, viral model, and stickiness all make this company attractive from the TGFX standpoint.

Central Node

Let’s call Node #4 DocuSign. Numbers 1-3 and 5-7 are Microsoft, Google, SalesForce, and hundreds of other smaller players.

Now, everybody wants to be the center. There’s power there, but there’s also a caveat: DOCU works so well because it is not any of the other players. By its very nature it must be different. If Microsoft moved in to create their own workaround, they would end up hurting themselves, removing themselves from the network of players.

DocuSign became the connecting node in a digital tribe. You can imagine the pain across many industries if DocuSign ceased to exist tomorrow. The rest of the players would quickly try to take the center role, only to further isolate themselves.

This is a sort of “doomsday device” in business where everybody wants the power, but outing the central node results in more pain for everyone involved.

Competitors

The biggest competitor to DOCU is Adobe and Dropbox. These two firms offer an e-signature alternative from DOCU, but is is not their main product. The major global e-signature market players are Secured Signing Limited, Adobe Inc., Entrust Datacard Corporation, SIGNiX Inc., DocuSign Inc., Ascertia Limited, Thales eSecurity Inc., Citrix Systems Inc., Gemalto N.V., RPost Communications Limited, IndenTrust Inc., eSign Genie, Glykka LLC, KeepSolid Inc., DocVerify Inc., Symtrax Holdings Inc., GetAccept Inc., SignaShare, and Zoho Corporation Pvt. Ltd (with more being created almost every few months).

Adobe has a market cap of 313.9 billion. Dropbox is 12.1 billion. DocuSign is 54.5 billion. The thing to note here is DocuSign is a pure-play e-signature company. Adobe and Dropbox are multiple-in-one solutions. DocuSign wins the “Do less then obsess” award.

Differentiation from Competitors

The main thing that differentiates DOCU from the rest is trust that comes from flawless integration. Most professionals use DOCU as their e-signature tool because the brand has established itself as the forefront e-signature solution. What’s more, the model of DOCU acts as a demo to pull in new users. For instance: if a realtor uses DOCU for their workflow, then the signers are using and learning about DOCU in real-time, greatly reducing the traditional pain-point of signing, scanning, storing, and tracking documents.

One of the other main differentiators is execution of a long term plan.

Here’s Sunny Bedi in an earnings call with DOCU:

I would say that the 2 big reasons why we chose you guys. One was your seamless integration with Salesforce. Professionals in the business don’t like to use multiple different applications and go in and out in completing the workflow. They want that whole workflow to be seamless where it’s — you go from one part of the process to another part of the process in a seamless manner. Our evaluation, or POC clearly gave you guys high thumbs up on that seamless integration you guys have built with Salesforce. So that was the primary reason. And then the second reason was the competitor landscape that we were looking at that competed with you guys, we didn’t feel they had a strong road map, like you guys did, as well as there was a lot of consolidation and private equity companies coming into that space. And so we needed to partner with a company like yours who has a rich product in the current offering but also promises a future road map that we could take advantage of. And we didn’t feel the competitors that we were looking at offered that same level of solution. So hence, we chose you guys. – Sunny Bedi, CIO Snowflake

The thing is, Adobe is about 6 times larger than DOCU by market cap, but DOCU is much more focused on a product that easily incorporates with external tools: Microsoft, Google, Salesforce, and the list goes on for quite a while. Combine this with a clear roadmap for future execution and you have a very interesting business.

Industry

If you’re like me then you’ve been subjected to the pain of having to physically sign and return a document without owning a printer or a fax machine. Organizations that do not embrace e-signature technology are quickly falling behind, and people leave those organizations everyday for less.

The main aspect of the e-signature industry is rapid adoption and underrated total market. I will save you the details, but some reports from 2019 and 2020 ‘predicted’ that e-signature market would grow to a whopping seven billion dollar industry. (That’s approximately a little less than one seventh the market cap of DOCU currently. Talk about undershooting!)

DOCU revenues in the last 12 months are almost 1.8 billion dollars. According to Prescient & Strategic Intelligence “the global eSignature market is projected to reach nearly 26.6% CAGR from 2021 to 2030. The U.S. currently holds the largest share (22%), but with the rapid adoption of digital technologies, the Asia Pacific region, India, China and Brazil are close behind.”

E-signature benefits, drivers for adoption, and implementation time by org size:

An e-signature app seems trivial, but it is a major element in the overall global digital evolution. It helps millions of businesses experience huge benefits in their operations. Although large enterprises have spearheaded the technology adoption, SMBs are not far behind. They have recently joined the e-Signature revolution to streamline workflows.

• 55%–78.62% – total savings of businesses migrating to e-signature apps from paper, taking into account material, administration, shipping, and subscription costs. (LunarPen, 2020)

• 37 minutes vs. 5 days – traditional and e-signature time difference in obtaining signed documents. (LunarPen, 2020)

• 80% – average reductions in turnaround time using e-signature. (LunarPen, 2020)

• 80% – average error reduction (LunarPen, 2020)

• 85% – productivity improvement (LunarPen, 2020)

• $20 – average savings per document (LunarPen, 2020)

• 500% – customer loyalty increase (DocuSign, 2021)

• 8 minutes – time to open bank accounts (Forrester, 2017)

• 22,000 hours – saved annually (Forrester, 2017)

• 60% – services enabled by Salesforce in 15 minutes by implementing e-signature (LunarPen, 2020)

• 90% – services enabled by Salesforce within a day by implementing e-signature (LunarPen, 2020)

• $19.35 – Salesforce’s average saving per document after implementing e-signature (DocuSign, 2021)

Risks

1. The biggest risk to DOCU is the competition of the unknown future. It’s easy to say “DocuSign is special and cannot be replicated” but why not? We’ve seen other large players create tools that are widely adopted across entire industries: AWS, Azure, and etc. The thing is, it’s entirely possible for one of the top 5 players (Google, Microsoft, Amazon, …) or another motivated e-signature startup to build a similar solution that DOCU provides.

2. Debt. Here is the Debt to Equity percentage for DOCU, quarterly:

No matter how attractive a company, a high debt/equity ratio, especially during this economic ‘fluff’, is a huge red flag. Debt is a fun tool during good times, but when markets take a downturn, debt wipes out entire companies. It doesn’t matter how popular or how innovative the company is.

DocuSign has a total debt-to-equity ratio of 431% as of 7/31/21. Here is DOCU compared to Adobe and Microsoft:

You can see both Adobe and Microsoft are decreasing their total debt-to-equity while DocuSign is increasing quite a bit.

Companies that are 1) High debt-to-equity, 2) large, and 3) popular, are easy pickings for lean small, and unpopular companies when markets take a downturn.

A note on inflation: since DOCU retains incredible pricing power they are not at the mercy of inflationary forces. They can easily raise prices without losing any customers.

Leadership

Dan Springer is the CEO of DocuSign.

Dan has almost 30 years of executive leadership and experience driving innovation and hyper-growth across Software-as-a-Service (SaaS) industry. Prior to DocuSign, Dan served as Chairman and CEO of Responsys (MKTG), where he led the sale of the company to Oracle in 2013 for $1.6 billion. Previously, he was Managing Direction of Modem Media and also served as CEO at Telleo, CMO at NextCard, and as a consultant at McKinsey & Company. Dan holds an MBA from Harvard University and an AB in Mathematics and Economics from Occidental College.

Dan is a professional executive. While this is great, it is not ideal. I would rather invest in a founder than a professional. I’m not sure who coined it first, but it’s mercenaries vs missionaries. A mercenary does great work when things look good and are going well. But if the cost of the mission is high, the mercenary bolts. The missionary completes the mission and risk of life and limb. Missionaries behind a solid mission are easy to invest in.

I like most things about Dan, and how he leads, but he’s no missionary.

On the other hand, Dan has an approval rating of 96% at Glassdoor, and is rated as one of the top 100 CEOs of 2021. This goes to show that not every CEO must be a founder, but it’s just one more thing I look out for.

If I had to rate Dan, it would be a 9.5 out of 10.

Valuation

Valuation matters, and always will. I think I get that from my time as a small business owner. If this business is not producing real assets at a reasonable price then that’s a problem. Let’s take a look.

The stock price is sitting right around ~300 dollars per share.

And here is quarterly Cash Flow per Share:

Notice how I’m not comparing this business to any others. That’s because the same story is told elsewhere a thousand times. Most businesses are expensive, and DOCU is no exception. DOCU’s popularity does not help either. I’ll be watching DOCU to fall out of favor with investors. This means a Price-to-Free Cash Flow of approximately 15 and no higher than 25.

Opportunities

The e-signature product is a first phase for DOCU. The data and opportunities are blooming from millions of agreements under their belt.

This is Dan speaking from their latest earnings call:

What we are going to do is leveraging the existing data and the reporting and analytics tools we have, as well as the increasing focus on artificial intelligence to go deeper to leverage that data to help our customers run their business better. And I gave an example in the prepared remarks, about how folks have been able to learn more about their business and be able to search against their agreements that they’ve done in the past to understand how they could quickly find information to, again, help them improve the performance, what they do.

We think we have a huge investment opportunity there, which we’re going to aggressively invest in. The Seal software was a great example of an acquisition we did to enhance — In this case, our artificial intelligence, engineering skill set. But I think you’re going to see us doing a lot more in the data science world to make our products more able to help customers run their business better.

The second thing is we can mine that information to help us drive more customer success. So we can take a look at how people are using our products, how they’re not using our products, which use cases they’re not availing themselves up. When they have incomplete segments of agreements because certain parts of the company might not be as responsive as others, and help them really pinpoint and run their business better and help them figure out ways to grow more with DocuSign because of that. So that’s probably the — I give you a couple of flavors, the things we’re excited about.

One of the things a lot of people ask about is, would we be able to figure out a way to leverage all the agreement across our different customers to offer different kinds of services to people? We’re super sensitive about that. At this point in time, we are a B2B software company. Our job is to serve our customers.

Taking their data for some other purpose is not on our road map in any way.

One thing sticks out to me here. I really like how Dan makes a public point that “Taking their data . . . is not on our road map in any way.” This circles back to the quality of leadership. Now we’ll see if he can withstand leveraging that data when times get tough.

Conclusion

DocuSign as a central node in today’s digital agreements economy is poised to do great things if all goes to plan. The thing is, nothing goes to plan. There’s always a catch. While the business model is antifragile, the balance sheet and price to free cash flows are not. This hurdle can decimate the company when economies or the business take a hit for whatever reason.

The important thing here is that the model itself might be enough to sustain the company through downturns. I’ll be watching for the price to free cash flow to reach a reasonable level of <25.

I have high confidence in Dan Springer to lead DocuSign through a detailed growth strategy, but I am not one to hope. As always, “we will see” prevails as my answer. I cannot tell the future. Nobody else can either.

Considering everything: the growth, the story, the leadership, and the sticky business model, I cannot justify buying at this time.

However, I’m a little excited to see how DocuSign evolves with the new digital economy as the leader in the agreements market.