Shares of DocuSign (NASDAQ: DOCU) advanced in the after-market hours of Thursday evening, hitting as high a price as $67 per share for a whopping 14.5% rally. The initial reactions are attributed to the company releasing its first quarter 2023 earnings results, reiterating its position as the first e-signature solution.

Serving more than 1.4 million users across various industries, the COVID-19 'work remotely' effects were only the beginning of what turned out to be an early household name. A subsequent stock rally can only begin to scratch the surface of what is really happening behind the scenes at DocuSign.

DocuSign is achieving what other names in the digitalization of everyday business activities have demonstrated to achieve. Businesses like Salesforce (NYSE: CRM) took the tedious and manual job of customer data management. Aiding sales teams and other corporate departments to manage better, analyze, and protect customer data turned out to be quite a value proposition in the marketplace, considering Salesforce's market capitalization grew to a current $200 billion. It would seem that, while in earlier stages, DocuSign could find its path into stabilization and predictable growth through its own value proposition.

Early Stages

It is uncommon when markets to read a company's earnings press release reporting double-digit revenue growth rates. Though in the case of DocuSign, it is nothing but expected. The company ended the first quarter of 2023 with $661.4 million in revenue, which translates into 12% growth from a year prior; subsequently, its subscription-driven revenue grew by 12%. Now the word 'subscription' here is significant to investors and analysts alike since it implies a recurring set of income through a determined contract period, thus deemed more stable and therefore, higher quality revenues.

Salesforce relies on a similar business model, deriving most of its sales from subscription services, enabling it to sell for a 6.2x price to sales multiple. DocuSign, however, is only selling for 4.5x multiple of sales. Of course, the market penetration and product adoption are not up for comparison, as DocuSign still has much ground to cover in its respective market.

In the financial crisis 2008, Salesforce also experienced a sharp sell-off (72% decline), which concluded in the stock selling for 4.0x to 4.5x its sales. After declining by as much as 87.3% from its 2021 high price of $314.76, DocuSign is in the same situation as the former.

While companies going through this 'growth stage' are expected to wait to turn a profit, DocuSign still has some earning power to speak of more unconventionally. The company reported a net income of $539 thousand, and even on top of double-digit revenue growth, this growth company stands to be one of the few who have yet to report a losing quarter. However, the actual numbers lie in the business's cash flow statement, where the real 'magic happens.'

Hidden Value

Disregarding DocuSign analyst ratings pointing to a mere 5.6% upside in the stock, investors can find a different way of measuring the value of this business. Net cash flows from operations were $233.6 million, delivering free cash flow (net capital expenditures) of $214.6 million in the quarter. The discrepancy between the reported net earnings and the earnings 'proxy,' that is, free cash flow, comes mainly from a $144.7 million stock-based compensation charge. It is typical to see high stock-based compensation items in a high-growth, early-stage company, as management deems it more effective to incentivize new talent via future equity rather than through higher salaries that may not be currently affordable.

According to management's earnings presentation, DocuSign has grown its user base by a hefty 21% compounded average growth rate (CAGR) over the past seven years. Keeping all things the same, and considering that the industry (again, according to management) carries a total penetrative value of $50 billion, DocuSign's last-twelve-months revenue of $2.5 billion would reflect a fraction of this massive opportunity seized. A continuation of double-digit growth rates in the company's user base, and other monetization strategies, could tap into a much larger market than 1.4 million users. 

Considering that DocuSign's price-to-sales multiple is at one of its lowest levels since its IPO, with a further comparison against Salesforce's darkest days before becoming an industry leader, the underlier relies on all the quiet catalysts to bring it upward. Sustainable, recurring subscription revenues, the number one leadership position in e-signatures across a variety of top-tier clients, and many more attributes are sure to quietly grow DocuSign's user base and revenue at continued double-digit rates.