We Move Back To Buy On DocuSign

Summary

• DocuSign stock peaked in August this year, began a modest correction and then positively dived into the abyss following its Q3 earnings this week.
• We believe the stock is once more at an attractive buy point.
• Fundamentals remain very strong - and we think the correction augurs well technically.
• We rate the stock at Buy on a long-term hold basis. We could yet see a further drop, so in staff personal accounts we are adding stepwise rather than betting the farm.
• Looking for more investing ideas like this one? Get them exclusively at Growth Investor Pro. Learn More »

Michael Vi/iStock Editorial via Getty Images

DISCLAIMER: This note is intended for US recipients only and in particular is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.

Sure, It's A Work From Home Stock. Whatever

DocuSign (NASDAQ:DOCU) is a work-from-home stock like e-mail was a tool invented to help postal workers relax more. DOCU is not a work from home business. It's a process automation business. Or in other words, an enterprise software company. Because all enterprise software companies do is to automate - a little bit anyway - manual business processes. Like booking rooms. Or signing documents. Or ordering more widgets. One of the wonderful things about investing in software is that software is still so unbelievably basic in the things it can do and in the amounts of things in the world it has yet to eat. DocuSign means you can handle documents and sign them - commit yourself or your company to their contents - without having to wield the tool fast going the way of the musket, the "pen". And whilst we can argue about whether DocuSign or Adobe (ADBE) is going to lead the way in document automation, it would be a very strange way to waste all our time if we chose to argue about, really, whether post-Covid-lockdowns, people are going to want to go back to using that pe ... what was it again - "pen", that's right - to sign stuff. We might as well argue about whether we should organize a machine-wrecking tour of the American industrial heartland this weekend because, you know, machines are the source of labor alienation and they should be smashed in the name of all that is human.

Fortunately if you have any cash left after this week's face-ripper, DocuSign is now on sale. If you read most coverage of the stock it will tell you that it is on sale because (1) it missed earnings and/or (2) it lowered guidance and/or (3) sellside analyst X, Y, or Z dropped the price target by two bucks and/or (4) because it's a work from home stock and that work from home this is so like 2020 right now and we aren't going back to any kind of virusy-lookin' restrictions any time soon, so, sell those work from home stocks quick-smart. But you know really why it cratered? Because it was due a correction. And why was it due a correction? Because that's what stocks do. They go up, for many reasons but no reasons that anyone can actually point to and say that's the reason, and then provide, you know, actual evidence to support their argument; and then they go down for all the same reasons. Again none of which anyone really knows. Whilst we are fiercely pro-fact, pro-Enlightenment, anti-anti-science here at Cestrian, we would be the very first to say there is no science or fact to stock prices. Underlying fundamentals, sure. Pure math. But stock prices? No, the only math involved in stock prices is the Golden Ratio, the Fantastic Fibonacci Sequence, the algorithm sat somewhere in fractal form in wetware read-only memory. And looking at DOCU through this lens, you could see that a correction was due.

Source: TradingView, Cestrian Analysis (full page chart here)

When a stock hits a 4.236 Fibonacci extension of its initial Wave 1 up, as DOCU did in mid-2020 (when, OK, the market priced it as a work from home stock), then puts in a not-too-painful Wave 4 correction, then a new high above that huge Wave 3 high? You know it's time to either sell or brace yourself for the hurricane that is about to hit. In our Growth Investor Pro Seeking Alpha Marketplace service we moved from Buy to Neutral when the stock was at $288 and thereafter commenced selling down in staff personal accounts (always flagged beforehand to our subscribers). We also, in the same service, called for a move to 50% cash at the open on Monday this week, which involved further selldown of our DOCU personal account holdings. We called "go to cash" because of that same Fibonacci sequence, this time the local tops struck in SPY and QQQ indices (a 100% and 1.618 extension of earlier Wave-1s respectively). You can read parts of that "be careful" subscriber note from last Sunday here.

So when the Big One hit DOCU, we held very little of it. Having surrendered more than all the value created in that last Wave 5 - as post-5-waves-up corrections are wont to do - the stock is now priced right around the level it was at in May 2020. When work from home wasn't really a thing that anyone properly understood yet. So if it was priced like a work from home stock? It isn't now. Oh and by the way, the company has twice the TTM revenue now that it did then (TTM revenue at Q3 2021 earnings was $1.96bn; TTM revenue at Q1 2020 earnings, the latest published as of 20 May 2020, was $974m), it is cash flow positive now (TTM unlevered pre-tax free cash flow margins of 17% in Q3 2021 vs negative 6% in Q1 2020), and, before you say "oh but growth must have slowed because of work from home", TTM revenue growth in Q3 2021 was +53% vs. +39% in Q1 2020. So the fundamentals are way better now than when the stock was last priced this way.

Source: Company SEC Filings, YCharts.com, Cestrian Analysis

And whilst we cannot yet call an end to the selloff - it will stop when it stops - we can express our most confident view that the next major move for the stock will, in our view, be up not down. And with this in mind we bought a little DOCU stock at the open today and we shall be adding a little more in a stepwise fashion over the coming weeks. Suitably re-armed with electronically signed stock certificates, we hope to ride the next Wave 1 and beyond up.

Here's the Enlightenment version of the valuation, based on the most recent close:

Source: Company SEC Filings, YCharts.com, Cestrian Analysis

13.5x TTM revenue for 53% TTM revenue growth, and 17% TTM unlevered pre-tax cashflow margins, we do not consider to be at all expensive. We think the next set of larger-degree waves for the stock will be 5-up. And so we rate the name once more at Buy - Long Term Hold. And again, we plan to continue buying stepwise in staff personal accounts.

Cestrian Capital Research, Inc - 3 December 2021.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of DOCU either through stock ownership, options, or other derivatives.

Business relationship disclosure: See disclaimer text at the top of this article.

Cestrian Capital Research, Inc staff personal account(s) hold long position(s) in DOCU

Comments

[crrj]

Buffet bought a nat gas pipeline----shhhhhhhhh

and exxon trades at 1 x sales

Apple is 7x sales

DOCU is 26 x sales ?????

[Cestrian Capital Research]

@crrj Seriously what is your point here?

[BAB3]

@crrj have to allow for growth capability, real debt, etc. Not apples to apples. In any case. I traded exactly as listed on Friday and it was quite a day on DOCU ;)

[BAB3]

@Cestrian Capital Research I didn't want to say that - but thank you.

[crrj]

At $60, its still 12 x sales lol

at $30 its still 6 x sales????

enjoy

[crrj]

buffet bought BAC after 50% drop at $20-----it went to below $6

[Cestrian Capital Research]

@crrj ? So ?

[bluescorpion0]

@crrj good point. even the best can't time the fall. buyer beware.

[BAB3]

@crrj Yeah and it's Berk's biggest holding and is up 700% since then... so?

[Eli Shapiro]

Recently we switched from DocuSign to HelloSign due to cost and more favorable terms. For us, it took a pandemic to draw attention to the cost and I would imagine other businesses will be looking at this as well.

[Cestrian Capital Research]

@Eli Shapiro Any major differences in functionality, usability, support etc?

[beyond growth]

@Eli Shapiro Hellosign is part of DropBox. not a huge difference for signing documents. You have to remember most millenials and maybe you will spend $5-10 daily on a mocha latte at SBUX. Slightly higher cost is worth it when you are very comfortable with the product for years. Like AMD vs INTC ,NVDA vs INTC, a Lexus vs Toyota (or Toyota vs Hyundai) , Mercedes vs Chrysler

[bluescorpion0]

@Reddington opentext also has esign. and is huge in content management.

[BAB3]

I'll confess to not always agreeing with Cathie Woods' choices - but the woman bought 3/4 million shares. The company is buying a ton on Tuesday. After a 42% drop... sorry - just not buying the doom (yet anyway). Futures all look good for the a.m. and foreign markets all look good so far at open. VIX is down almost 3%... I'll confess to holding a LOT of this stock at closing price and nothing so far is making me question that call.

[Out_on_a_limb]

The ADBE meme is annoying to death. PostScript is not a good language for information retrieving. CLM will be used for that to start with. But what will matter more to the lawyers is being able to crank out more documents quickly. Because they are paid dearly for doing this, rather than managing archives which is a marginal service to them. CLM can become a smarter automation tool than Word.

I doubt ADBE will go toward CLM due to its culture and PostScript legacy, it is a company based on designing documents (layouts, graphics, pixels, animation), e.g presentation. While here, it is about content.

[jeffk100]

nice litany of the virtues of software and all its yet to do with a segue into elliot wave nonsense but im not seeing how any of this helps a company with no moat run by a ceo who admits to sitting on his butt too much instead of generating demand for his product!

[Cestrian Capital Research]

@jeffk100 We don't care about helping the company. We only care about trying to work out the medium term trajectory of the stock price. Which is where the nonsense comes in handy.

[BAB3]

@jeffk100 Roundung out the few lowered metrics for NEXT quarter you get essentially 3% decline...for a quarter that ends in 4 months... I'll take a CEO who takes responsibility and targets deficiency, then acts. A 42% drop shows the age / mindset of retail investors these days... someone above points out Buffett buying BAC then watching it fall again... except it... and the stock is up 700% since the quoted $6 sp - which I can't verify.

[Go and do likewise]

How does this impact DOCU? From Forbes in July 2021
----------

I covered Box's acquisition of eSignature platform SignRequest earlier in the year. I believe the acquisition of SignRequest was a smart move for Box by including the final puzzle piece needed to enable a truly all-in-one experience for managing enterprise content without building an eSignature tool from the ground up....and one aspect that surprised me is that it doesn't plan to use the same business model as other eSignature tools...
Box is implementing Box Sign into its Box platform at no extra cost to the more than 100,000 Businesses that already use Box Content Cloud...Box platform users have unlimited native e-signatures for all users of the Box Core Subscriptions.

www.forbes.com/...

[beyond growth]

I'm not a great chartists but I also noticed DOCU was extended and making lower lows / lower highs in an environment where if you're not part of the Big 6 tech leaders you get pummeled. I sold 1/10th of a position at $260 2 weeks prior and I bought a put 2 days before earnings. this may get to the low 90s or 100s and I'll buy OTM calls then. All the headwinds in front of us tell me the market is not a time to commit loads of cash.

[klausmkl]

@Reddington exactly, just wait, let it base first, establish its low. Money is flowing to defensive sectors now. Sector rotation is now

[PrivacyFiber-Safe from Eavesdroppers]

I am not a Docusign fan. Since executing a few documents, I seem to get all kinds of Phishing emails, with Docusign - which raise concerns over security to me. I like the utility of the company, but somewhere there is a leak on possibly a transmission fiber inbound or outbound from their data center and email addresses are being harvested or it just could be coincidence but it has potential especially if they begin adding bio-metrics to compound the assurance that the signature is of that individual and not just a digital copy.

[beyond growth]

@PrivacyFiber-Safe from Eavesdroppers DOCU's biggest flaw:
husband and wife are to sign documents and each gets an emailto sign. What if one spouse has the others email pw? Same for partners in a company.
It's not ID safe at all. There's more authentication when you log into Coinbase or your online bank acct.

[davidlifter2]

Please educate me: I purchased real estate in 2020 and leased several storage units in 2020 and 2021 and – in my case – all used e-signature software but NOT DocuSign.

Isn't e-signature of documents a commodity business? Is the software for DocuSign patented or a wiz bang in some aspect?

Why would one prefer DocuSign software or to buy DocuSign stock over the others?

[spinlessandfactful]

@davidlifter2 my understanding is docusign places the documents for review and signatures electronically instead of via the old paper mode. Esignatures are an electronic version of just signing. Docusign is just a bit more than that, in that the suite of executed documents are stored for future review and modifications as needed. The software does away with physical printing, and storing of documents. DOCU part of its name explains the documents presented electronically and sign part of it their execution without having to physically print and sign as earlier. Idea being saving of paper, printing, and storage in physical mode and all of these functions switched online, with ease of future reference provided. I am not sure of any competitor with such a long history or size as docusign is. Would love to hear some critique on whether they are in a commoditized biz or it is just the beginning of a phenomenal new trend. GLTA.

[bluescorpion0]

@spinlessandfactful is it a document storage company like Iron Mountain?

[beyond growth]

@davidlifter2 You may have used DocMagic.

[r Negoro]

The more it drops, the more it will be tax harvested. My call, it will drop another 15 pct. Almost every high growth is a falling knife. The reason it dropped a lot is because the market perceives it as a reverse wfh.

[Bogie 1]

All the comments to this well written article screams of a buyout soon. Microsoft can integrate them to their Windows Suite, which would be accretive immediately.

[eager1]

@Bogie 1 Exactly! I can't understand why they have not been bought and MSFT is a perfect connection. They also fit with any FinTec stock where DocuSign is widely used. Banks should buy them but they are too stupid.

[nathanlane]

@eager1 You mean banks strategy too cheap

[Go and do likewise]

Thought this was interesting from Wasteland Capital.

"$DOCU managed to issue 11.2 million shares to employees during the last 12 months, which at yesterday’s price would be worth $2.60 billion. Their sales during the last 12 months were $1.96 billion, so they had to give away $1.3 in shares for each $1 in revenue."

3:50 PM · Dec 3, 2021

[Cestrian Capital Research]

@Go and do likewise If you start looking you can find a lot of names like that.

[Cestrian Capital Research]

@Go and do likewise NB wish we had thought of the name "Wasteland Capital" first. That's awesome!

[No Guilt]

Obviously we aren’t going back to pen and paper but that doesn’t mean the company is worth $40 billion.

I did but a small starter position yesterday as this company is on my watch list. They have an amazing tech, earnings are greeting up and to the right, SAAS margins and honestly I think there’s more than just Docusigning something electronically. There is now but I think they have even more bolt on opportunities they haven’t even offered yet. “Digital Transformation”.

So if the stock goes up I didn’t miss out, if it drops another 40% due to the overall market or a miss I can always add to the starter position. No need to go all in at once.

[canyon]

My take is this will be "dead money" until they can prove (earnings cycles, so a quarter maybe two) that this quarter was a one-off. I like DOCU, but there are better (similar) stocks that I think will outperform it, so, for relative outperformance, I sold half my position (cost basis around $60) and put in limit orders on other stocks that have come way down (not saying on sale) - ZS and CRWD... the IT security hack/breach tailwind is just so big, this is the opportunity to continue to build out those positions.

[Let The Led Out]

@canyon would you mind sharing what you’ve set your limit orders for? My cost basis on CRWD is 171 and while I have full conviction in their execution one has to wonder if the changing macro climate is going to cause some of these high fliers to have lower relative valuations? My plan is to watch from the sidelines until the dust settles. Interesting that ZS hasn’t nearly sold off as much as CRWD.

[Cestrian Capital Research]

@Let The Led Out ZS is much earlier in its maturity cycle than is CRWD in our view. (Long ZS, sold out of all CRWD over last few weeks).

[canyon]

@Let The Led Out
Sure, glad to share. Note, in ZS I have a nice start to a position with a cost basis around $60... but what to add. Same for having started a nice position in CRWD but my blended cost basis is right around the current price.

Limit orders:
CRWD $152
ZS $235

These are set using some easy TA, and noting I have already started positions a while ago... if I currently owned zero shares I would start with a small purchase now and DCA into the bigger holding adding at those levels (nearly blood in the street levels that I suspect we might not see, but if we do...).

[2959]

I don't know, a +40% drop? Oversold or just finding it's correct value? I've used and continue to use them as an end user (even prior to Covid) specifically for Real Estate transactions. That said, it again looks like Foreclosures/sales are looming in the near future. I've been looking for an entry point on this for sometime. I was going to add to Apple's pullback (yes, I get Apple pays a dividend to hold, and Dividend reinvestment has been great) but then on Friday decided on this instead (small lot). But this is for me, I'm not buying for Clients or Institutions so I don't need to explain losses etc. Down further or Up? That could be anybody's guess, but I have no timeframe requirements. Guess I'm more of a Contrarian. Been wrong before, I did own GE. But luckily I've been right more often.

[No Guilt]

@2959

Agreed, DOCU has always been on my watch list. Sad I didn’t buy it 4-5 years ago.

I wasn’t planning on buying but sometimes you have to deviate from your plan and take what the market is giving you.

[FLMike]

It’s a screaming buy. The sell off or percent drop doesn’t matter to me. What matters is how long will it take for the company to right the ship. CEO took full blame for the misstep on CNBC yesterday. He got on national TV and did what every CEO should do. Explain everything. Coming out of the pandemic he was looking for a softer landing. That didn’t happen. He expects the next quarter to have everything back to normal. If you are a long term or medium term investor start buying

[No Guilt]

@FLMike

A lot of CEOs don’t fall on the sword.

[FLMike]

@No Guilt yes that why I says he did what other CEOs SHOULD do. Even the moderator of the show was surprised he took full blame that’s a CEO I can trust. The CEO of any company is a major factor in my decision to buy a stock and this guy won me over completely

[bluescorpion0]

You cannot say rotten fruit is ever on sale. It isn't a bargain at almost any price.
What do they have? a commodity way to stamp your prints. Big deal. Without diversifying into RPA or other value added services like escrow or authentication it seems a one trick pony that is still severely overpriced.

[No Guilt]

@scorpion.north

Have you ever used the competition? They suck.

[Cestrian Capital Research]

@scorpion.north (1) Why so annoyed? It's just a stock. (2) The gross margins and cashflow margins tell you it isn't commoditized.

[bluescorpion0]

@Cestrian Capital Research My apologies. i lost 19% on a tiny position. But i'm a perfectionist so I'm pissed.

[Mudi68]

This stock will go as low as 100$ as end of the year selling pressure will happen to benefit from tax reduction. So wait till January before buying any fallen stock

[No Guilt]

@Mudi68

I hope so

[BAB3]

@Mudi68 I saw plenty of short available out there. If that's the case that's a heck of a downward score in 30 days. If I believed that I'd be shorting on margin... you may be right, but I don't think this market is ready to cave just yet. There is still enough buy the dip mentality out there too. A 42% dip on a 12 figure company will be hard to resist I think.