Motley Fool Hidden Gems Investing - Fools Duel Over DocuSign: Is It Still a Breaker?

Starting point is 00:00:00 We duel, you decide. Two fools make the case for and against DocuSign. You're listening to Motley Fool Money. Hello, I'm Tim Byers, lead advisor of Motley Fool Rule Breakers, and here with me is my teammate of 20 years on that service, Rick Gnarez. Rick, how are you this morning? I'm doing great. Excellent. Excellent. We're going to talk some breakers today. Are you ready to duel over whether DocuSign stock, ticker D-O-C-U, will be a market beater over the next five years? I was born to fight, so I'm ready, Tim.

Starting point is 00:00:49 I know you were born to fight. I've known you for a lot of years. Rick, give us the bull case here quickly. So we'll do two-minute bull, two-minute bear, and then we're going to get you fools to vote in the comments to this show. But Rick, go ahead. Two minutes. What's your bull case? All right. There's no denying that digital signatures are a game changer. The road to better mousetraps is paved with ideas that save time and provide convenience. Business was already accelerating for DocuSign heading into the pandemic, but everything changed when the COVID-19 crisis made old school ink signatures not just inconvenient, but potentially unsafe. Revenue picked it up a notch, rising 49% and then 45% in the first two fiscal years of that

Starting point is 00:01:29 shelter-in-place era. Like many pandemic plays, business slowed for DocuSign after that. But, and this matters, unlike many pandemic plays where revenue growth disappeared, that hasn't happened here. It may have bottomed out at an 8% top-line growth rate last year, and revenue is up 9% so far in its latest quarter, filling up an even better 13%. So, business is actually starting to pick up, not go the other way. Maybe you thought that DocuSign was one of those companies that just fell out of the investing radar. And the stock chart, well, yeah, it makes it look that way. The stock is trading 75% below its all-time high set four summers ago, but it's not. Revenue has obviously never been higher than it is right now. DocuSign

Starting point is 00:02:09 was losing money when its stock peaked in 2021. It has never been as profitable on an adjusted basis as it is right now. Margins, including gross margin, have never been higher. The platform popularity has never been higher with more than a billion users worldwide and a record 1.7 million paying accounts. There are competitors, Adobe Acrobat Sign and Dropbox Sign are smart rivals with healthy resources. It's a sign of the time, so to speak. However, with DocuSign trading at a reasonable 20 times forward earnings and business potentially picking up right now, do you really think it can fail? I ink not. Very nice. Well, let me give you the bear argument, Rick. I like it. Here's my way. Well, here's, here's a couple of thoughts here. DocuSign may be trying

Starting point is 00:02:55 to learn some new tricks, but for now it is still a one trick pony. And I think that's objectively true. Roughly 62% of customer contracts are for less than or equal to one year. So a lot of this revenue is very short term and that puts this on, you know, somewhat shaky ground. That'd be fair. It's been like this for a while. E-signatures do matter, though. And, you know, the world has largely agreed, though, that DocuSign is who we need to execute our agreements. What's the reason to pay up for a long-term relationship with DocuSign?

Starting point is 00:03:31 I mean, we get it. The DocuSign did change the world. But I don't know if this is one where we absolutely got to have it all the time such that we're signing a multi-year agreement. but it's not just that that troubles me a little bit here, Rick. It is true that DocuSign is back to generating cashflow from the business, but virtually all of that capital is flowing into buybacks. And I don't really get that, Rick. If the opportunity for DocuSign is so massive, then why isn't excess capital being funneled back into the business? I mean, surely that is the best

Starting point is 00:04:08 use of capital, unless of course management doesn't believe reinvesting back into the business will produce innovations that drive growth. So you have two points of view there, and we do this all the time, fools. It's an exercise to know both the bull case and the bear case. Please vote. Tell us what you agreed with most.

Starting point is 00:04:28 Did you like Rick's bull case or did you like my bear case? Let us know in the comments to this podcast. We really appreciate that. And a quick business reminder before we move on to our next segment, that Andy Cross and Emily Flippen will be interviewing DocuSign CEO Alan Tegeson

Starting point is 00:04:49 on Fool 24. And that comes with your premium membership to the Motley Fool. So if you are a member, you get to see the CEO of DocuSign interviewed by Andy and Emily. Up next, who's afraid of the big macro? All right, we are back.

Starting point is 00:05:07 Rick, we're going to start with the big macro here. and some poor jobs data. Here's how Reuters put it last week. The U.S. economy likely created 911,000 fewer jobs in the 12 months through March than previously estimated. That seems not very good. The government said on Tuesday, suggesting that job growth was already stalling before President Donald Trump's aggressive tariffs on imports. So, we've seen dire economic reports before, Rick. The housing crisis, the credit freeze tied to the Great Recession. This doesn't feel like much of a crisis, but it may be a worry. So, here's my question for you, Rick. Are you changing anything in your stock selection process to account for fewer people with excess

Starting point is 00:06:00 cash to burn? Yeah. So, I mean, I don't like that, obviously. And it's a concern. But as a long-term investor, I tend to fine-tune my portfolio over even dramatic changes rather than wholesale changes. Lifestyle changes is the only thing that will make me allocate my money differently. When our second son was born and he was a special needs son, I'm saying, well, hey, we're not going to have the basic emptiness trajectory. So, I invested a little different. when my wife retired, was able to retire early two years ago, we said, okay, well, now we're going to have to be a little more conservative, at least with some part of our portfolio. And obviously, as you now know, Tim, I'm going to be a grandfather now. So I'm moving

Starting point is 00:06:40 on to the third generation of Munarriz's here. In January, it's kind of different because, hey, they're up in New York, we're in Florida. I may be doing a lot more traveling than I thought I would be doing, possibly even maybe considering some kind of real estate to bounce around Florida and New York rather than just stay in Florida and mid-Florida like I do my whole life. So these things will make me be a little more conservative in my investing. But for the most part, I don't think that you can just say, hey, this is a trend that's happening. I'm going to just follow everyone into that trend, especially if you had high convictions in the stock you have. To me, what I've always believed is good investors, they go to where the puck is going,

Starting point is 00:07:16 but great investors go to where the puck is going after that. And I see a lot of great trends. you're thinking, well, Hey, it's interest rates are going to be moving lower potential in the few months. Uh, it's gotta be a great time for housing. Well, Wayfair has already more than doubled. So you have these easy, obvious plays. They're already moving, but I don't respond that way. Um, obviously I like the companies I like, I will add to them in good times and I will continue to add to them in bad times. Yeah. I mean, get that five 29 for the grand kid going, Rick. I mean, let's, let's see, you know, that's, that's the, that's, that's the thing to pay attention to. But more broadly, let's come back to the big macro here. You've been a Fool investor for over

Starting point is 00:07:54 30 years. I've been a Fool investor for almost as long. What about the macro stands out to you based on what we're seeing? The job losses are one thing, but is there anything else that stands out to you? Yeah. So, to me, I mean, obviously, the consumer price index that we also got last week. It's up 2.9% over the past year. Core CPI is up 3.1%. This isn't great, but it's not problematic. However, the full impact of tariffs hasn't really been baked into those numbers. But again, you mentioned the employment issue. And I'm telling myself, is the optimist in me seeing this that, hey, it's because companies are more efficient now and all these things? Or is there really just an actual economic crisis happening at this time? The consumer sentiment, that's one

Starting point is 00:08:40 that I do worry about. So Friday, we got the consumer sentiment out of University of Michigan and it declined again. It's now 21% lower than it was a year ago. So that concerns me, especially since I know you and I like tech stocks, but I really love like consumer facing retail stocks too. And that's one industry that I'm scared about right now, because if consumers are afraid, they're not going to be spending as much. And I think that's one thing, again, I wasn't going to make a wholesale change in my portfolio, but if I see that trend continue, then maybe I may have to pair back there and put my money in other growth markets. But yeah, I'm watching and I'm hoping for the best. I think every investor should be optimistic, but always watch your back.

Starting point is 00:09:17 Yeah. I mean, that's good advice. Always watch your back. You mentioned other growth areas. And so I want to explore that just briefly. If there are other growth areas that you think maybe have a little bit of resilience what might those be i'll tee you up with one that you and i have talked about a lot and maybe this will give you a some some room to expand viking the cruise line that's one that seems to have endured through every economy we're talking about people who are in our age cohort rick you know 50 plus excess income they're going out they're spending on these luxurious river cruises. And honestly, that's in every economy. That has been really difficult to disrupt. Are there others like that that you think are just like high quality,

Starting point is 00:10:10 really resilient? Yeah, you have obviously the high-end market, as you pointed out. That's why Viking has that advantage. It's mostly retirees who already have everything mapped out so they can afford to make these. These aren't your cheap, regular cruises you have on the mega boats. these are very, you pay a premium for that. But you also have sort of the other end of the spectrum. I think like, you know, the five belows of the world, Aroku, which is a company that thrived during the last economic downturn because people were just, hey, we're at home, we don't want to spend money. And while the ad, it's very ad dependent, it is still like free platform to watch, free platform to get on. They have a free ad supported channel and companies like that can

Starting point is 00:10:47 get through this. And obviously companies not in the Rule Breaker scorecard, but Costco is obviously a retail-facing name that should thrive well. Still got the hot dog. Still got the hot dog deal. Still $1.50 for that hot dog and soda, so you can't beat that. So yeah, they're doing a lot of things right and able to keep those costs down. But yeah, I think there's some good tech plays, too, that you can play in this where it'll work out. But to me, yeah, there's always an opportunity no matter how stormy it may be outside. Yeah. All right. Up next, faker or breaker? We take a look at three different stocks and tell you whether or not

Starting point is 00:11:22 we think they are a genuine Rule Breaker or whether or not they are a faker. All right, Rick, we're back. And this is something that I hope our members and our listeners really like because this is a little bit of insight into how we select Rule Breakers. You know this game really, really well

Starting point is 00:11:43 because we do this every time we pick a stock. For Motley Fool rule breakers, we have to decide whether or not a business is a breaker, meaning that it checks off most or even all of the six traits of a rule breaker that David Gardner has identified and has been using to pick stocks for well over 20 years now. And by the way, quick plug on this, please make sure you pay attention this week to the release of David's new book on Rule Breaker Investing. You're going to want to get that if you haven't yet reserved your copy. But Rick, let's talk about this. Let's talk about breakers or fakers and the definition of a faker. For those who don't know what this is, it's a stock that is growing

Starting point is 00:12:31 really fast and it looks like it may have breaker characteristics. It's just on a rocket ship and it's grown really fast and it's got a lot of interesting things about it and the market tends to like it but the growth is due to fizzle out it's just not going to be able to keep this up so that's when we see fakers so rick let's talk about three stocks here's what i want to know for you from you these have been high performers over the last 18 months baker or breaker astera labs ticker A-L-A-B. And I'm going to give a quick description of this. This is a semiconductor company that designs and manufactures connectivity. These are chips for connectivity. And it's been really important for like AI and machine learning. They've gotten a lot of love

Starting point is 00:13:26 because of this, because there's a real belief they're going to be part of the AI revolution. This is founded in 2017, about 440 employees. This is according to Microsoft Copilot, about $38.3 billion in market cap, Rick. So what do you think? Astera, faker or breaker? I'm going to go with a breaker, and I want to explain why. To me, I see a stock that Astera is basically a five-bagger over the past year. And normally, you're going to be hesitant. You when I know better. Not buying into a stock because it's a five-bagger, it's a lot like selling. I'm not going to sell the stock I own that's down 80% because it can't get worse. We know things can get better for good companies, things can get worse for bad companies.

Starting point is 00:14:09 Estera Labs, they're at that great pick and shovels play for connectivity for AI and for cloud computing infrastructure. And not only that, it's in the numbers. You can just hit all the right buzzwords and still fail. But this is a company that is growing, and it continues to put out beat and raise performances quarter after quarter lately. Everything's picking up. I think the upticks are earned. Yes, it is overvalued, but you know what? Some of the best stocks you may ever buy start off as overvalued. So to me, it is a breaker. Yeah. We have heard the overvalued argument many times before. All right, moving on. Number two, Open Door Technologies, ticker O-P-E-N. This is a digital real estate company. Specifically, it's one of the early pioneers in

Starting point is 00:14:59 what was called iBuying. They buy up a bunch of property, then they have a digital real estate agency, and they do a lot of the selling through their own digital platform here. So they carry a lot of inventory on their balance sheet here, Rick. It's an interesting company. It has been around since 2014 headquarters in san francisco about 1470 employees as of last year again according to co-pilot and it went public as a SPAC for those who don't remember this the SPAC craze from a few years ago which is a special purpose acquisition company had a bunch of money it goes public and that big bucket of money acquires a private company and by default takes it public. So Rick, Opendoor with its iBuying platform, faker or breaker?

Starting point is 00:15:51 Yeah, I'm going faker. But again, I'm going with a lowercase f in this faker because I don't want to completely dismiss it. But let's talk about the whole iBuying market. To me, I was never a fan when Zillow and Redfin followed Opendoor into this market several years ago. Thankfully, they both backed out, took their hits. It seemed like a way to grow revenue, but with negative margins, it wasn't going to help out the overall business. I'm glad they're out of it. Opendoor is still sort of struggling with the profitability of it. But now that they're in the market and now that we're, yeah, so the stock, let's talk about the stock. This is one of this year's hottest stocks. And normally you think, well, Estera has also been a very hot stock over the past year.

Starting point is 00:16:32 But in this case, this is a business that is not where it was. It's not necessarily growing. The stock is 9X since the end of 2022, but its revenue is a third of what it was in 2022. People are obviously looking ahead saying, hey, real estate market, all this is going to happen. The only reason I'm going with a lowercase faker instead of just saying uppercase faker is because after what Zillow and Redfin went into, they're not going to dive back into this market. So, open door, as far as the big publicly traded companies, there are a lot of people doing the iBuying thing. You may even have a cousin or an uncle or you yourself flip homes. There's going to be a lot of people in it. The big companies that sort of just stormed into this market are

Starting point is 00:17:09 not going to do it because investors are going to say, oh, you burned us here before. So I think it has that advantage right now, and it has a scalability advantage that it has over individuals and smaller players in here. So I'm sort of optimistic that maybe it'll get it right this time, but I'm definitely not following it right now. Obviously, it's a meme stock. Not every meme stock has to go south, but I do think that that may be a little inflated for the reality right now in what's very a cutthroat market in the long run so faker but lowercase faker all right i'm a look out chip and joanna gains you know we'll we'll see all right last one and i'm gonna have to eat some crow on this one reddit ticker rd dt um this is a community it's a community platform

Starting point is 00:17:57 I think it's wrong to call it a social media platform. It's driven by user-generated content. I think it's closer to YouTube than it is to say like Twitter. It's just like YouTube with text, you know, lots of threads, subreddits. So it, I mean, Rick, this one has been extraordinary. Founded in 2005 by Steve Huffman and Alexis Ohanian. That would be Mr. Serena Williams to the rest of us. founded in san francisco employees 2233 march 2024 the ipo and honestly rick i mean this market cap

Starting point is 00:18:37 now is 48.2 billion the latest quarter revenue up 68 percent ad revenue up 56 percent and here's the thing where i have to eat crow i always ask our team to write you know reports like two pagers for things we want to consider for Rule Breakers. So this is like, I don't know, a year ago. Rick, I asked you to write a two-pager on Reddit. And at the time, this is true, fools, because I went back and looked at it. Rick, it had a market cap of $5.5 billion

Starting point is 00:19:11 at the time that you wrote that report. And I chose not to put it in Rule Breakers. So yeah, that happened. Uh, Rick breaker faker. Yeah, I'm going with breaker, uh, obviously. And, and, and there's no shame. I keep toothpicks around to pick the crow out of my teeth. We all have to eat it as growth investors. We're not going to be right all the time, uh, with Reddit again. Yeah. It's, it's, it's a community of communities and they do so many things, right. And I think when they went public again, revenue was up to 21%. You were talking about that slated growth for 21%

Starting point is 00:19:44 and 20 for all of 2023, right before it went public. So it was easy to wonder. Uh, and they were like, Oh, we can monetize our platform. And you're thinking, well, well, the users revolt because this is the kind of system where they are the leaders. It's not the company running it. It's the community that's really running each of these tiny tens of thousands, hundreds of thousands of different individual communities. Would they revolt? And they sort of did, but they accepted it.

Starting point is 00:20:05 And the company revenue up 62%, so basically more than tripled in its first – the year it went public, and accelerating again in 2025. And, again, it's a very dynamic source. And while I know stuff like the Google algorithm has sort of messed up a lot of companies and how it's, it's still never fails. Like if you ask any question, odds are that Reddit is going to be bubbling up near the top because it's, it's vetted by a community. Uh, it's, it's kind of perfect community situation platform. Yeah. It's a great company. I don't know the ceiling on Reddit. Um, but I know we underestimated, uh, you know, how high the floor could actually

Starting point is 00:20:37 be. So I think, yeah, I think Reddit's a breaker. Yeah. A couple of quick reminders as we close out here. So again, please let us know. DocuSign, do you think breaker or faker? Did you like the bull argument, Rick's bull argument, or did you like my bear argument? Let us know what you think about DocuSign. We want to hear your comments to this episode. And also, just as a reminder, if you are a Motley Fool member, and it's very easy to sign up for Motley Fool Stock Advisor or any number of services that we offer. Andy Cross and Emily Flippen will this week be interviewing DocuSign CEO Alan Tegason for Fool24. That is part of your membership at any tier, and you can go to the site and get access to that interview. So look for that. And please do give a quick look at your

Starting point is 00:21:32 local bookstore for Rule Breaker Investing from our co-founder and chief Rule Breaker, David Gardner. that's going to be an outstanding read. I've seen the book. I can vouch for it. We're going to end it there. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you do. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements our sponsored content, and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Rick, thanks for joining me.

Starting point is 00:22:19 Fools, thanks for listening. For Rick Benares and our engineer, Dan Boyd, I'm Tim Byers. We'll see you again soon, Fools. Fool on, everyone.

Motley Fool Hidden Gems Investing - Fools Duel Over DocuSign: Is It Still a Breaker?

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