Remember DocuSign (DOCU) ? The name was an original member of the pandemic portfolio that I drew up for readers about a year ago. The name indeed did work its magic on at least my own portfolio for most of 2020's increase in share price. I am now flat that name and have watched as the shares had started to move sideways as early as last summer... and as with much of what we call "growth" have moved toward the bottom of six month trading ranges of late. Time to re-engage? As I have been the one adding on nearly every tech dip over the past week and a half, I have waited with open arms for this one to show up again in my wheelhouse.
DocuSign will report the firm's fourth quarter performance on Thursday afternoon. Expectations are for EPS of $0.22 on revenue of $408 million. If realized, these numbers would be good enough for earning growth of 83.3% on revenue growth of 48.4%. I see 16 analysts following this stock. There has not been a lot of movement over the past quarter for this group throughout the quarter on what they anticipate. The range of expectations for EPS runs from $0.19 to $0.29, while the range is even tighter for sales at $403 million to $419 million. Believe it or not as gaudy as these numbers appear, they would actually illustrate a declaration form the Q3 earnings (adjusted) growth of 100% on revenue growth of 53.5%.
Once upon a time, signatures were done in person. Two people had to be present together. Three if a witness was necessary. This one aspect of getting business lagged well behind the innovation seen elsewhere despite DocuSign having been around since the late days of the New York Yankee dynasty almost 20 years ago. What the pandemic did was in many cases bring forward evolutions in the way people work and live that might have taken much longer to gain acceptance. This is where DocuSign comes in. If people are going to live almost anywhere, and work either remotely or in much smaller groups, then there had to be a way to automate tasks requiring documentation in such a way as to not have to rely upon snail mail.
The question now is, how much of that pandemic reinforced growth was "transitory" and how much is now the way things are done? I think instant documentation is here to stay. I also think the ESG crowd (which is rapidly becoming everyone) likely gets behind a firm like DocuSign. At some point, "virtual" documentation or paperwork that only exists in the cloud will become the norm. There will not be a hardcopy except upon request and those requiring hardcopy are not going to grow in numbers.
While I think DocuSign continues to grow, albeit at a more realistic pace. Consensus is for full year earnings growth of 139% for 2021, but just 51% for 2022. Full year sales growth is expected to run a rough 47% higher for 2021, and about 21% for 2022.
Do I really want to pay 192 times forward looking earnings for DOCU? Or... 32 times sales? We are not even looking at significant short interest. As of three months ago, gross profit margin was quite attractive at 78%, operating margin far less so at -12%. At that time the firm's current ratio ran at a just barely acceptable 1.01, while the firm's quick ratio stood at 0.96, which could show some trouble meeting short term obligations should a crisis arise. (What could DocuSign possibly have in inventory?)
In short, I like the business and it's potential to at least hang on to some of the progress made during the pandemic. That said, DocuSign is expensive, as in really, really expensive.
Traders will see just how lengthy this basing period of consolidation has been. What is interesting of late would be that the shares had lost the 200 day SMA and then clawed that level back this week as some funds have poured back into tech and Nasdaq type names. Holding $213 is key to DOCU short-term. A break there, and last week's low of $189, becomes important. The shares could meet resistance at $227 (21 day EMA) and $238 (50 day SMA) on any attempt to climb back to February's high of a rough $275.
I have no problem with trading DOCU at this time. I would be hard pressed to bless an investment unless said investor took steps to either hedge the investment or take appropriate action to reduce net basis significantly. I am more likely to purchase $217.50 puts expiring tomorrow for about $9, while selling $207.50 puts also expiring tomorrow for $5. What that does is risk $4 or $400 per contract to try to win back $10 ($1K), to end up with a profit of $6 or $600 per contract.
What an interested investor who wants to own equity could do would be to purchase let's say 100 shares of DOCU at $217.50 (or so), and write a "covered" June 18th (next earnings season) $230 call for about $21. You may think "I'm paying $217.50, I don't want to cap my profits at the $230 level." That would be misguided. This traders net basis would be $196.50, and a $230 sale should the trader be so lucky, would be good for a 17% profit over three months' time. Slow? Boring? Effective.