DocuSign: Growth Won't Be Enough To Keep Fueling The Rally

Summary

• Shares of DocuSign have rallied more than 120% in the year-to-date.
• The demands of remote-work have more or less corrected DocuSign's sales execution issues from last year. Revenues grew 39% y/y in Q1, actually showing slight acceleration.
• Investors are banking on DocuSign to continue leading the charge to a paperless work environment.
• However, with a gargantuan >$30 billion market cap, DocuSign will need to start showing more progress on profitability to continue rising.

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DocuSign (NASDAQ:DOCU), the ubiquitous e-sign company, has been one of the biggest winners in the software sector all year. Fueled by the rally in work-from-home software stocks, DocuSign has been an unexpected beneficiary of the coronavirus, as the closure of offices has forced companies to rethink how to transform paper processes with both employees and customers. It's hard to imagine that as recently as last year, when DocuSign was trading in the ~$50s, investors considered this company a "penalty box stock" because of its sales execution issues (DocuSign should offer proof for investors in the future not to shy away from buying names that are out of momentum). All of DocuSign's past faults have since been forgotten, and now the stock is one of the highest-flying names in the software sector.

I'm a big proponent of championing growth and a company's "story" in its early days, even at the cost of profitability. But DocuSign is hardly a startup now. With its >$30 billion market cap, and the fact that shares have advanced about 5x from their 2018 IPO price of just $29, DocuSign will start getting weighed against other larger-cap companies that have more to show on the earnings front. Right now, investors are cheering DocuSign's recent inclusion on the NASDAQ 100 list, knocking out the suffering United Airlines (UAL), but this recognition also means that DocuSign must also start showing a bottom-line story. And so far, though DocuSign has shown some marginal progress on cash flow and margins, the company's pro forma margins remain low and GAAP losses are still prevalent.

At the moment, investors are throwing caution to the winds. At DocuSign's

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