DOCU: product need vs rates of growth

[XMFMonkey]

With DocuSign losing more than 1/3 of its value in the market, Monkey, who holds a tiny little position left over from the good-ol-days of COVID lock-downs, remembers reading the following over and over again:

“The world is not going back to paper.”

Which appears to remain true.

But it also now appears to be completely irrelevant with regard to how successful investment in DOCU might be going forward.

So the sincere question is: when making the case for DocuSign, did it ever really matter that the world is never going back to paper?

Or is the rate of growth the only thing that really truly matters anymore? To which Monkey has a follow-up: doesn’t that bring us a bit closer to market-timing?

Let’s consider that world is never going back to paper, and that Docusign is by far the leader in all things e-signature + bells and whistles with their 121 NDR, and still has a huge swath of international expansion to get to, but the CEO is also saying we’re going back to normal spending patterns, and that next quarter’s growth is only a few percent.

Is this exactly the Zoom problem? That the product is so good, and grew so fast, that there are fewer customers who don’t already use it?

In which case, the world never going back to paper is irrelevant; more relevant is that e-signatures has a limited audience, and DOCU captured most of it very quickly, and the market confused “never going back to paper” with infinite paper to never go back to, when in reality, it was quite finite.

So if rates of growth are almost all that matter in this context, ought we not be careful making our original thesis statements? The fact that the world is never going back to paper appears, in hindsight, irrelevant; the good times could never have lasted.

Or, to play devil’s advocate, is this just a short vs. long term framing problem? And because the world is never going back to paper, Docusign will remain a growing company but over a much longer time frame, and what mattered was not buying the stock when the market expected 50% growth forever? Which brings Monkey right back to the unpleasantly smelling arena of “market timing”?

This problem seems to affect most companies now–expect, apparently cyber security and data, because in a sense, those two realms are as close to “infinite” now and in the future. Hence the success of SNOW + DDOG + ZS + CRWD.

But now consider MNDY: they are growing 200+%. And let’s imagine we say “the working world is never gong back to sticky notes and pens and paper.” Which very well might be correct. But what if the 200% growth has gobbled up, like Zoom and Docu, a huge swath of its buyers at a very high rate, and some upcoming quarter, maybe not the next one, or the one after that, we’ll be right back in DOCU + ZM land: workOs is here to stay, but the rate of Monday’s fast growth was its own worst enemy, investing-wise. Making “workOS is here to stay” irrelevant as a thesis statement.

Are we now essentially market timers focusing on rate of growth, hoping to get in at the early part of the “S” and out close to the peak of the hockey stick? Are statements like “the world is never going back to paper” irrelevant?

Just thinking out loud,

Monkey, long a tiny bit of DOCU
(@cxddesign on twitters)

[jck101]

But now consider MNDY: they are growing 200+%. And let’s imagine we say “the working world is never gong back to sticky notes and pens and paper.” Which very well might be correct. But what if the 200% growth has gobbled up, like Zoom and Docu, a huge swath of its buyers at a very high rate, and some upcoming quarter, maybe not the next one, or the one after that, we’ll be right back in DOCU + ZM land: workOs is here to stay, but the rate of Monday’s fast growth was its own worst enemy, investing-wise. Making “workOS is here to stay” irrelevant as a thesis statement.

Are we now essentially market timers focusing on rate of growth, hoping to get in at the early part of the “S” and out close to the peak of the hockey stick? Are statements like “the world is never going back to paper” irrelevant?

Maybe?

Docusign and Zoom are essentially one product companies. Once you buy the enterprise edition of Docusign you’re set, sure your volume may grow as your companies grows, I believe they have per seat and per use plans, but other companies are declining and this growth is fairly slow overall. Same with Zoom, there is no zoom add on feature worth anything, once you buy it, you got zoom. Sure they may have something some techie is going to come on here and tell me about people can pay more for, but most people just want to sign stuff and have small < 10 people meetings. Also Zoom and Docusign have straight up replacements, in MS Teams and Adobe Sign. 90% of people could switch and never notice the difference. Smaller companies will naturally switch over to consolidate who they pay since they already probably MS and Adobe. (Also people are starting to develop home grown alternatives to Docusign, so the moat is probably small, my real estata agent uses one)

Monday (although I’m not really a fan of their products) has a wide range of product offerings, so you’re always thinking about hey, that looks interesting, maybe we could use that, and each one is significantly different than just more of the same. Their competitors are also not drop in replacements, so switching is hard. I think this is also generally true of SNOW, DDOG, ZS, CRWD, once everyone in the company who should be using it is using it, they can still expand with new product offerings that make sense.

[JabbokRiver42]

Monkey,

At the beginning of 2021 I held both DOCU and ZM and have exited both at different points in the year. Zoom was an emotional sell for me, since it was the first stock I ever bought (April 2020) and the only one I had in my portfolio in 2020. It was hard to say goodbye to an old friend who introduced me to this wild ride.

But the reason I sold both was not solely the slowing growth; it was the lack of optionality within the company. The world is not going back to paper signatures (although some of the people I deal with have yet to get the memo), but I don’t see any bold moves into adjacent markets. They did move to contract management, which is good and provides a way to upsell the people who only had them for signatures. I would like to hear a vision from them on what other secular tailwinds they might be able to ride into other kinds of markets. But I don’t hear that.

Zoom thinks a little more broadly and should they find a way to link arms with CTV, for example, it could be really interesting again. Eric Yuan seems capable of thinking outside the box, and I’m rooting for him–even though I’m doing it from the investor sidelines for now.

A company like Monday (MNDY), however, has the advantage of being in the guts of businesses of all kinds. From that position, they are able to observe the emerging needs and innovations within every company and industry that uses their software. With strong management, they will be able to develop new products as new use cases arise, likely before the competition. It seems to me that Monday doesn’t need to dream up optionality on their own. They just need to solve problems for their customers as they arise and then roll out those solutions to everyone else.

Monday’s advantage is similar to many of the companies held by most on this board. By creating a product that is essential to a very wide range of companies–or, in the case of something like cybersecurity, EVERY company–there is a network effect where a customer has a need for a new solution and the software companies they already partner with get the first heads up and therefore the first opportunity to develop a new product to meet the need. Now they are instantly more valuable to every industry that shares that same need.

So, I don’t see it as market timing; although that is essentially what you have to do with a company that isn’t showing optionality or doesn’t have a broader vision than their current product. Maybe DocuSign will discover other ways to be of service to their customers. But e-signatures doesn’t give them the visibility into the entire organization the way that many of our other companies do.

In other cases, like Upstart, you have a company with such a massive potential TAM in an industry that Dave Girouard likes to point out has been around for 5,000 years (lending). In Upstart’s case, they can continually innovate and disrupt as they observe trends and learn from their data in real time. And they are collecting massive amounts of data. Co-founder Paul Gu said in an interview (which was posted to this board but now I can’t find) that they are currently limited not by data, but by compute. Processing technology simply is not yet fast enough to keep up with Upstart!

By contrast, can DocuSign survive if we quickly evolve beyond needing a signature at all? Suppose there’s a new kind of universal, digital ID? Do they have a plan for that? Ad tech is working on universal ID; is DOCU at that table? Can they move beyond signatures to identification more broadly? That’s the kind of jump I’d be looking for.

And what happens if I don’t stop thinking about this and go do my job? That vision is a bit clearer for me, so I’ll stop here. Thanks for getting my brain greased and whirring this morning.

JabbokRiver

[Smugley]

Monkey,

I really enjoyed reading these thoughts.

It made me think:

1. Traditional market timing is considered to be based on timing the ‘price’ of a stock.

2. If we follow the ideas from the board, are we still timing the market but instead we are timing based on the acceleration or deceleration of ‘growth rates’, be that revenue, ARR or customer adds to name a few popular metrics. Are we not using these metrics as early indicators of price movement in essence to ‘get in’ and ‘get out’ of the ‘S’ curve at the most appropriate time? In that sense we are still market timers; but with just a bit more rationale behind the decision making than timers of price alone? This makes me consider that we are indeed timing the market.

3. If we consider the recent pandemic, are the stocks that benefited from a; ‘pull forward in earnings’ experiencing a hangover from the inevitable reduction in growth rates, which is metric that the market clearly desires above all else in our stocks. If this is the case (which it must be) then surely this is a short term unique situation for these stocks. Imagine how ZM and DOCU may have grown without the pandemic. I would suggest more slowly but still up and to the right. But I do agree that there is a finite amount of share to capture; hence why optionality is key for the long term growth story for those kinds of businesses.

To summarise my thoughts.

I think we are ultimately market timers to some degree otherwise nobody would care about the positioning of a stock on the ‘S’ curve for entry and exit. And let’s not kid ourselves, while we focus on the business metrics, we are here to make money and Saul has always said that. We simply make timing decisions based solid rationale, not on stock price alone.

The pandemic effect of certain stocks has made us appreciate that not all SAAS based companies have the same market opportunities. Optionality may allow some companies to maintain their growth rates for longer, based on their particular product. I think, in condensed time frame, we probably learned this from PTON. Data and Cyber security stocks have optionality. So to do companies like DOCU and ZM, but their ability to pivot into these areas quickly is likely lower and as such we see growth rates that are tougher to maintain.

My thoughts, for what it’s worth.

[rtichy]

Smaller companies will naturally switch over to consolidate who they pay since they already probably [verb here?] MS and Adobe.

Having a hard time deciding which way this statement is intended to go. After the word “probably” is it “use” or “hate”?

Because my sense is that a lot of dev shops “hate” Microsoft, and you’d have to be pretty big to stomach their Office seats and the SQL server licenses, etc. When people say Teams is a cheaper Zoom at $4/mo, I think “for places that are already stuck in Microsoft” and Microsoft is giving that away to prevent defection, not to attract tons of new customers.

[invain]

I feel sometimes in these situations we tend to overanalyze things a bit, or over-speculate, partly due to the shock and emotion involved with drastic swings like we’re seeing. I don’t think anyone would expect DOCU to be down this much if the market conditions were different. Almost all Growth/Cloud/SAAS stocks are down 5 - 10% today, that’s just going to magnify DOCU’s reaction to earnings (the ETF WCLD is currently down 6.34%, that’s pretty close to the largest single day drop I’ve seen yet, even compared to Feb/March of this year).

Let’s state some simple facts:

After this recent hair cut, sitting at a $27B market cap, DOCU has a P/S of roughly 14 based on $2B revenue for FY2021, and a forward P/E of somewhere in the range of 50 - 75. This is compared to many other growth stocks that have yet to turn a profit. NVDA has a P/E around 90 right now for comparison.

The quarterly results were great. Everything was a beat, and don’t forget these numbers were in comparison to last year, which was peak COVID mania.

The market is obviously reacting to the billings growth next quarter. Yes, growth is decelerating, obviously, considering the boost from COVID. But they will still probably grow around 30% next year. Does that seem like a disaster? Absolutely not. Things are returning to “normal”. DOCU was doing just fine before the pandemic. I would also caution lumping this in with other “WFH” stocks like ZM. DOCU estimates their TAM at roughly $50 billion and in my opinion that is only going to increase, regardless of the pandemic. I work in the pharmaceutical industry and my company adopted Docusign when social distancing restrictions started being enforced, but I guarantee you we will consider to use it long after the pandemic is over. People are learning how convenient it is to just send an envelope via Docusign instead of having to walk around several buildings gathering signatures. This is an efficiency gain that is not going to magically disappear as more people return to the office. This is also not a service that ordinary people started using like Zoom because they couldn’t go to class in person or visit their doctor in person. The companies that were using Docusign before and during the pandemic will continue using it long after things return to normal.

I could be completely wrong here, but I don’t think the “thesis” is broken, nor that anything is wrong with the company. I think the market is completely overacting, just like it has done with everything else over the last couple months.

[NajdorfSicilian]

Are we now essentially market timers focusing on rate of growth, hoping to get in at the early part of the “S” and out close to the peak of the hockey stick?

Oh, I don’t think that’s a new thing. Buying a stock is always, de facto, ‘market timing’ is it not? I mean one day you didn’t own CRWD and then you did.

You also indirectly made a great point in that some firms are S curves and others are hockey sticks. You want the hockey stick growth so you can hold forever [MSFT, ADBE, AMZN, GOOG] the S-curve is always much trickier as you have to buy low and sell before growth evaporates.

Are statements like “the world is never going back to paper” irrelevant?

Yes, because they make no mention of valuation nor competition nor innovation. It’s a good place to start looking for up and coming [or underpriced existing] but that’s all it is.

You could say the same thing about Avalara – with all the tax changes and implementation of sales tax collections in every state/city – everyone will replace Excel hand calculations with specialized software. Etc.

Great post, btw.

Naj,

Long CRWD, MSFT, GOOG, ADBE, AMZN, AVLR, S, SE, SHOP, et al

[n8larson]

Buying a stock is always, de facto, ‘market timing’ is it not? I mean one day you didn’t own CRWD and then you did.

No, “market timing”, in this context, means actively using stock price information before a buy/sell decision to decide whether to wait, as a means of seeking the best POSSIBLE outcome. I think what you describe there is more about looking backward: “there was a time when I bought” is not necessarily “market timing”. I think that to invest without timing the market is to incorporate other factors (like what else I might want that money for, investing or otherwise) besides the current price, and to buy/sell when it makes sense based on general conviction about the company, as a means of seeking the best PRACTICAL outcome.

You also indirectly made a great point in that some firms are S curves and others are hockey sticks.

I’ve always pictured it differently: the hockey stick is just the beginning of the S-curve, way-zoomed-in in time, on a very young stock or one with a hard catalyst (like a drug approval)(or a pandemic). There are precious few stocks that can ‘go hockey-stick’ and hold it for a long time. The S curve is just the long-term inevitable trajectory of a solid company, and one very important feature is that the chart viewer has to zoom way OUT to avoid seeing how bumpy it usually is along the way.

-n8 (holdings at profile)

[PaulWBryant]

For what it’s worth, I don’t think market timing has anything to do with this. You’re talking about value investing vs growth investing.

Monkey, you hit on the problem DOCU is having: “the market expected 50% growth forever” (aka hypergrowth)

We believed something like that too, temporarily, and explained the great numbers we were seeing at the time with narratives like “the world is never going back to paper.” That wasn’t a thesis – it was a way to reconcile what we were seeing – that DOCU was growing so impressively.

Then, when it became apparent that DOCU wasn’t going to grow at 60% or 50% much longer (much less forever or for years), we (at least some of us) got out. That’s growth investing, which is the subject of this board.

PLEASE, LET’S END THIS THREAD.
Bear
Asst Board Mgr

PS Though it’s off topic, for what it’s worth I agree with you that ZM and DOCU are starting to look like “values.” But I’m no good at value investing, I find it VERY difficult, and most importantly, it’s not appropriate for this board!

[invain]

Sorry Paul, but I don’t see how this is off-topic. This is taken directly from Saul’s Monday rules of the board posts:

“We DO discuss and analyze individual high-growth companies. (Usually that currently means 40% revenue growth or more, although there are a few rare exceptions of companies we grandfathered in because many of us had been invested in the company for a long time before revenue gradually tapered off).”

DOCU just reported Y/Y growth above 40%, and the stock has been discussed on the board for a couple years now. I completely understand the need to manage the board and reduce the amount of “noise”, but I fear that sometimes the rules seem to change based around the sentiment of a particular stock. I don’t intend for this to feel like a personal attack on the board managers, this is just my honest observation over the last couple years.

[n8larson]

“Sorry Paul, but I don’t see how this is off-topic.”

Thank you for bringing this up. I agree the thread is good; Naj and I helped take it away from the primary thread focus with our words about market timing in general, and that might be what Bear was addressing with his shutdown post. I think you’re right, and I wouldn’t be surprised to see my post get pulled.

Onward Saul’s. : )

-n8 (long a bit of DOCU)