A Pure-Play LegalTech Stock for FinTech Investors

Way back in 1975, Harvard Business Review wrote a piece on the importance of market share. The higher the market share a company has, the more likely it is they’ll be able to show a superior return on investment. Intuitively this makes sense based on things like economies of scale. Says the piece, “once a business achieves a leadership position—possibly by developing a new field—it is much easier for it to retain its lead than for others to catch up.” The article goes on to say that companies selling into fragmented populations who make infrequent purchases will stand to do best.

Credit: HBR

Look no further than one of our biggest holdings, Illumina, to see this in action. Another example is a fintech stock we’re going to look at today called DocuSign (DOCU).

About DocuSign Stock

Click for company website

DocuSign first came across our radar in a recent piece we published on How Companies Use AI for Contract Negotiations. The company’s bread and butter is their eSignature functionality which allows anyone to sign documents without having to grab a pen. With an estimated 70% market share, DocuSign is challenged only by Adobe which commands about a 20% market share. The simple act of signing a document has provided a gateway into a whole lot more opportunities to sell things.

Credit: DocuSign

DocuSign estimates the total addressable market (TAM) for eSignatures at $25 billion, and contract lifecycle management at an additional $25 billion. (The entire legal services industry in the U.S. alone sits at around $250 billion.) That’s a $50 billion opportunity that they’ve only begun to capture with $1.45 billion in revenues for 2020, of which 20% was international.

DocuSign’s latest investment deck is an easy read which focuses on the opportunity at hand and the products they been building and acquiring to address it.

Credit: DocuSign

DocuSign has more than 12 applications spanning the entire contract process, and they’re even planning to add remote notarizations via videoconferencing. Since their 2018 IPO, revenues have nearly tripled, and The Rona seems to have left them alone, which indicates that DocuSign’s offering will be resilient in the face of crisis. (Their stock price barely reacted when the rest of the market was plummeting in March 2020.) It’s consistent revenue growth like this that every investor craves.

Credit: Yahoo Finance

One thing that stands out in the deck is how rapidly they’ve been able to grow their customer base. Over 890,000 customers now use DocuSign’s platform, 600 of which are spending more than $300,000 a year. With a retention rate of 123%, DocuSign customers are increasing their spend over time, which is exactly what you want to see for a business that’s 95% subscription revenues. Land and expand as they say.

A Dominant Position in LegalTech

Once you’re the market leader, it’s critically important to understand the latest and greatest things happening in your space. This often means investing in those companies which might compliment your existing offering. We previously mentioned how AI contract negotiation company Pactum took funding from DocuSign, and there are others as well, each of which appears to be a “build or buy” decision by DocuSign.

Credit: Crunchbase

Look no further than the investment in Seal Software, a pioneer in AI-driven contract analytics, which ended up being an acquisition which closed last year. DocuSign described the purchase as “advancing our AI analytics infrastructure” which began in 2017 with their acquisition of Appuri.

All this growth and future potential hasn’t gone unnoticed by investors who have propelled shares of DocuSign into the stratosphere. Let’s talk a bit about valuation.

DocuSign’s Valuation

Looking at the past performance of a high-performing stock you don’t hold sucks for several reasons. Firstly, you may feel like you “missed the boat,” which hardly seems likely with DocuSign. Secondly, it creates some apprehension around starting a new position. When DocuSign had their IPO in 2018, shares began trading at $38.00 a share. Today, those same shares trade for $195 a share – a gain of about +400% compared to a Nasdaq return of around +100% over the same time frame. Our simple valuation ratio – market cap / annualized revenues – doesn’t show DocuSign to be extremely overpriced at 22 (38 / 1.724). Here are some other company valuations for comparison.

Company NameRevenue DataAnnualized Revenues
(billions USD)
Ratio
Palantir4Q-2020*41.28834
UiPath2021 Actual0.60764
Splunk1Q-2021*42.987
C31Q-2021*40.19637
Alteryx4Q-2020*40.649
Blue Prism4Q-2020*40.28
Snowflake1Q-2021*40.7689

After a strong run up in spring of 2020, DocuSign shares have been slowly coming back down to earth, and now trade for about the same price they did a year ago. Seems a good a time as any to draw a line in the sand with an initial purchase and then add over time when shares fall below the cost basis. In this way, we remove the psychological pain of losses. When shares fall, we’re happy because we’re able to buy more at a cheaper price.

To Buy or Not to Buy

The Nanalyze Disruptive Tech Stock Portfolio now contains 32 names, and we’ve been having internal discussions about limiting that number. We’re a growing research firm with minimal resources, and we don’t want to spread ourselves too thin. That said, we want to make sure some arbitrary number isn’t keeping us from investing in promising stocks we come across.

In the case of DocuSign, they fall under our fintech category, which presently contains two positions – the Global X Fintech ETF and a European payments stock. When it comes to what we’re looking for, DocuSign checks all the boxes:

  • Market leader with 70% market share
  • SaaS business model
  • Growing organically and through acquisitions
  • $50 billion TAM with about 3% penetration – plenty of room to run
  • Reasonably priced growth based on our rudimentary valuation ratio
  • Saves companies money so likely resilient in case of recession
  • No red flags that we could find

While we have nothing but good things to say about the Global X Fintech ETF, we think DocuSign presents a better way for us to generate some delicious alpha. One plan would be to slowly back out of our fintech ETF position, then use the money we’re freeing up to accumulate DocuSign. We can even use the ETF’s future performance as a benchmark to see how good a decision we made to put our chips on DocuSign instead.

Conclusion

Loads of venture capital money are pouring into legaltech startups with an emphasis on contract management using artificial intelligence. DocuSign has millions of leads from users of their core offering – eSignatures – and they have proven their ability to upsell customers once they land them. We couldn’t find much fault with DocuSign, and think the stock would make a great addition to any fintech investor’s portfolio.

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