That could be the next step unless you wanted to try some different flavors of headphones. Different headphones are going to have a very noticeable change in sound, compared to an upgraded DAC which can often be a subtle change. But if you love your K701 and want to further refine their sound, a DAC upgrade and/or mods to the M-Stage would be your next step.
It is confusing when you put it that way. Maybe it will help to think of an integrated amp. Let's say you have speaker outputs on the back rated at 140 watts per channel. You also have pre-amp outputs so you can later upgrade to a dedicated amp if you want. These pre-amp outs are controlled by the main volume knob, yet they aren't sending out 140wpc. At some point the signal is being split and routed separate ways; one goes out the pre-amp RCA jacks on the rear, while the other goes to that last amplification stage and then out to your speakers. Apply that same thinking to the M-stage and it starts to make sense. The specifics vary from one product to the next, but the general idea is the same and it means that you don't have to worry about lowering your SQ.