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We are discontinuing analyst coverage of Docusign.

We will discontinue analyst coverage of Docusign on or about Sept. 11. We provide analyst research and ratings on over 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

Our fair value estimate for Docusign is $90 per share, which implies a fiscal 2027 enterprise value/sales multiple of 5 times and a 4% free cash flow yield. We model a 7% compound annual growth rate over the next five years for revenue, along with the non-GAAP operating margin increasing from 30% in fiscal 2026 (actual) to the low 30% area in fiscal 2031. We think medium-term growth will be primarily driven by new users and more use cases and more consumption at existing customers, as well as growing adoption of the IAM solution as more features are introduced. We expect the firm to benefit from increased penetration in the international markets as well. Further, we see average revenue per user increasing as customer size increases and more customers adopt the complete suite, which carries higher pricing. We expect modest scale on cost of goods sold and more leverage on all operating expense line items over time as well.

We assign a no-moat rating to Docusign. We see the company’s business as moaty in general as a result of the proof point from covid and a high degree of recurring revenue, with the underlying moat source being switching costs. However, we are concerned that the company derives nearly all of its revenue from e-signatures and has been unable to gain more meaningful traction with some of its newer solutions, such as contract lifecycle management, thus far. As retention metrics have deteriorated, we also lack confidence that the company’s positive economic returns will continue for the next 10 years.

Switching costs for software are often driven by several factors, in our view. The more critical the function and the more touch points across an organization a software vendor has, the higher the switching costs. There is also the direct time and expense of implementing a new software package for the customer while maintaining the existing platform and retraining employees on a new system. Additionally, there is operational risk of changing software vendors, including business process reengineering, loss of data during the changeover, and overall project execution. A major implementation is likely to involve a system integrator and can take in excess of a year in bad cases. Lastly, lost productivity is likely to be an issue as customers move up a learning curve on the new system along with the distraction of users involved in the function where the change is occurring.

We view e-signatures as a noncore application that improves operational efficiency and reduces costs. That said, we think companies are looking for modernization in their contracting process. The use cases for e-signatures are many, such as purchasing a home, where a typical contract requires more than 100 signatures from all parties. Customers can absolutely forgo the adoption of Docusign or competing solutions. By doing so, they would continue to execute contracts via traditional paper-based means. The efficiencies gained and cost savings earned are small but can become meaningful. According to management, each signature on the company’s platform saves $5-$100 (average of $36) for the user, relative to the time, effort, and shipping or other costs needed to obtain signatures under a paper model.

Retention metrics typically help inform investors on both the presence and the durability of a moat. These come in two flavors: gross, which describes what percentage of the customer base remains customers after a given period, and net, which highlights what percentage of the customer spending is retained by the software provider after a given period. Docusign only discloses net dollar retention, which had been 113%-117% before the covid lockdowns, jumped to 120%-125% during the lockdowns, and had trended down below 100% in early 2024, which we view as temporarily depressed in a postpandemic hangover. We almost never see net retention dip below 100%. For more mature software providers, we would expect to see dollar retention in the 105%-112% range. Software firms regularly see higher retention rates for enterprise customers relative to smaller customers. Given Docusign’s mix of small and large customers, we would expect retention to skew lower on average.

Docusign is best known for e-signatures, but it also provides a larger solution, Intelligent Agreement Management, which includes a variety of applications to help users collaborate on the preparation, execution, and management of a contract. The company also offers some related services and specialized features at an incremental cost that we think would mainly pertain to business pro users. The platform approach has not been a robust growth engine thus far. Lastly, there is a usage cap on the number of signatures, or envelopes, but additional envelope provisioning can be purchased. We see primary use cases as financial services, real estate, healthcare, life sciences, legal and compliance, and government, all of which have a specialized industry vertical offering from the company.

Docusign sizes the market for e-signatures at $25 billion, plus another $25 billion for the rest of its solutions. On the e-signature side, we think there are dozens of competitors, but realistically we see just a handful of meaningful peers. Docusign is the clear leader in this niche, with Adobe being the next-largest competitor and the one that should be the most feared, in our view, given e-signature capabilities within its ubiquitous Acrobat solution. Other notable competitors include Dropbox and PandaDoc.

Docusign is the market leader in e-signatures and is expanding to a broader contract lifecycle management solution, which is finally gaining traction.

The free trial, easier implementation, and rapid return on investment for Docusign customers make for a compelling sales pitch. The company is also enjoying success moving upstream to larger customers.

Docusign has turned the corner on profitability and now generates attractive free cash flow margins.

Docusign has experienced a surge in lockdown demand and then a dearth of growth in the years since. Just as the company is finding its footing with IAM gaining traction, we observe the rise of AI that potentially threatens software in general.

E-signatures may ultimately be a feature on a broader workflow platform rather than a full-fledged solution suite.

As the company moves upstream to increasingly larger clients, it is likely to face intensifying competition, particularly from Adobe.