Shares of eSignature tech firm and popular lockdown beneficiary Docusign (DOCU) have suffered such a painful fall from grace.
With the stock now off around 61% from its high hit just over a quarter ago, many investors are in a rush to hit the panic button, with fresh memories of a brutal past quarter and the broader Nasdaq 100 sell-off driving the name lower.
While DocuSign has yet to surrender all of its 2020 gains, all it will take are a few more bad days before all such gains are wiped out. Indeed, many momentum chasers likely lost their shirts chasing the firm on the way up.
While the pandemic may be far from over, recent action in lockdown stocks like DocuSign seems to suggest that everyone will be due to return to the office again, with paper forms and agreements done the old-fashioned way.
After such a steep decline, exacerbated by anticipation of much higher rates, I remain bullish on DOCU stock.
WFH Trend Still at Play
Even if the pandemic goes endemic in 2022, many hybrid and remote workforces are probably not going back to the on-site model. Intriguing technologies like DocuSign have made working from home the way of the future, outbreaks or not.
Indeed, it’s hard to imagine that the COVID-induced acceleration to the digital transformation is about to grind to a halt.
DocuSign faced stiff year-over-year comparables in its last quarter. Combined with higher rates, the firm may look downright toxic to optimistic investors.
DocuSign may have been given a lockdown boost in 2020, but does the stock deserve to shed most or all of its gains just because the worst is over with? Probably not.
DocuSign: Starting to Get Cheap
At writing, shares of DOCU trade at 11.3 times sales. For a company growing its sales at a 35%-45% pace, I find the valuation to be extremely conservative, even considering the inability to sustain a profit (on a GAAP basis) over the medium term.
Yes, higher interest rates will punish such unprofitable firms, and while the company got a boost in 2020 and 2021, I don’t think the elimination of such a boost will leave a long-lasting dent in the firm’s growth.
Nasty Quarter
The latest quarter seemed like a solid earnings beat, with $0.58 in per-share earnings, surpassing estimates calling for $0.46. Still, the firm fell short on the billings front. Despite the beat and the impressive 42% in year-over-year sales growth, management’s guide was a cause for concern.
Indeed, investors seemed to care less about the quarterly results themselves, with more attention focused on forward-looking guidance. The results themselves were not terrible. Further, I think a guidance downgrade is only the conservative thing to do in the face of so much COVID-induced uncertainty.
I’m not a fan of near-term guidance and think long-term investors can capitalize on opportunities to buy on a lousy guide, as long as the longer-term fundamentals are still intact.
Indeed, DocuSign customers aren’t in a rush to get everything done digitally anymore. The initial pandemic boost is wearing off, and conditions have shown signs of normalization already. Still, I do think DocuSign will have the means to move higher again now that investors seem to hate the stock.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, DOCU stock comes in as a Moderate Buy. Out of 15 analyst ratings, there are seven Buy recommendations, seven Hold recommendations and one Sell recommendation.
The average DocuSign price target is $203.69, implying an upside of 67%. Analyst price targets range from a low of $165 per share to a high of $307 per share.
Bottom Line on DocuSign Stock
DocuSign’s billing numbers were a cause for concern, but with solid growth prospects and a now low bar set ahead of it, I think DocuSign stock represents a compelling value after such a brutal tech sector sell-off.
Hybrid work is here to stay, and demand for DocuSign’s Agreement Cloud offering could prove most robust than most expect as we move on from the worst of the pandemic.
The bears see a mere unprofitable lockdown stock that’s finally seeing the tides turn against it. The bulls see a solid revenue grower on the right side of a secular trend, and a potential means to improve operating margins over the long haul.
Both the bulls and bears have a strong case. At these valuations, though, I’m inclined to side with the bulls. There’s just way too much negativity in the name here.
Download the TipRanks mobile app now
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Read full Disclaimer & Disclosure
