Can DocuSign Justify Inflated Value?

The DocuSign Inc (NASDAQ:DOCU) IPO debuted Friday and represented yet another successful tech IPO. DocuSign shares surged past their initial price of $29 and currently sit at nearly $40. According to Fox Business, DocuSign’s implied valuation is at least $4.41 billion, making it yet another hot tech IPO investors want to jump in on.

Investors will worry about whether DocuSign will continue to be a value investment at its new higher value and I unfortunately believe that DocuSign is not a great investment at its new elevated value. DocuSign has good indicators in its favor, but the threat of competition from larger businesses should cause investors to wait and perhaps look elsewhere.

A Simple, Useful Product

Even if you have never heard of DocuSign, you have probably used them at some point. The company facilitates e-signatures, removing the traditional cursive paper signature with something simpler and cheaper. In its SEC report, DocuSign states that “Since our founding in 2003, our customers have completed over 700 million Successful Transactions on our platform.” And while DocuSign is used by major companies across the globe, 370,000 businesses to make contracts simpler and cheaper.

The result is a company that on the financial side looks rather successful. DocuSign like most tech companies reports high revenue growth and a negative net loss. DocuSign’s revenue for the years ending on January 31, 2016, 2017, and 2018 grew from $250.5 million to $518.5 million, representing year-over-year growth of approximately 52% and 36%. Furthermore, net losses shrunk from $122.6 million in 2016 to $52.3 million in 2018. This is a tech IPO which has a solid shot of becoming profitable in just a few years, and is the strongest card DocuSign has in its favor.

But there are some negatives. Revenue growth rate is slowing down, and this is considering the fact that DocuSign had to raise its marketing expenses by over $100 million from 2016 to 2018, and I would like revenue growth to improve or at least not continue to decrease. DocuSign’s accumulated deficit also sits at over $500 million, though this may not be a major concern given that it raised $629 million in its IPO.

The Competition Problem

In a vacuum, DocuSign looks like a solid company as it is the rare tech IPO which is growing could become profitable in the near future. But businesses do not function in a vacuum and I think there are real, serious problems about DocuSign’s ability to compete with other companies.

DocuSign names Adobe Systems Incorporated (NASDAQ:ADBE) as its primary competitor, as Adobe has its own electronic signature solution called Adobe Sign. Adobe is a larger company, but what makes Adobe Sign such a threat is Adobe’s close partnership with Microsoft (NASDAQ:MSFT). Last September, the two tech giants announced that Adobe Sign “is now Microsoft’s preferred e-signature solution across the company’s portfolio, including the 100 million monthly commercial active users of Microsoft Office 365.” Given that practically every business uses Microsoft Office to some degree, it would hardly be a stretch to see them steadily get more accustomed to Adobe Sign at DocuSign’s expense.

But the real danger could come from somewhere else. Other global software companies could easily decide to develop their own e-signature programs used in credit card machines, which would represent a major threat. Given that DocuSign’s revenue growth is slowing down even though it has not faced much significant competition, and it is easy to see how this company’s rise could be blunted.

It is possible that one of these tech giants may choose to cooperate with or even buy DocuSign instead, and there may be room for everyone in the short term given that the e-signature will continue to expand in value. And if DocuSign can get enough customers, perhaps it would be able to survive by representing the status quo. Nevertheless, DocuSign will face plenty of challenges attempting to grow further in the face of steepening competition.

Look for the Come Down

Practically every tech IPO has seen an exuberant first few days, but it is difficult to figure out which ones will succeed in the long term and which ones are a product of the current tech euphoria. Given their current heights, it seems more likely that most of them will go down than up and DocuSign is no exception.

There is little reason to buy DocuSign at its current share price given that it will fall once the IPO wears off. Even when it does fall, I think other tech IPOs like Smartsheet Inc (NYSE:SMAR) will be a better investment. DocuSign has potential upside, but the threat of competition and slowing revenue growth means that investors should look elsewhere for now.