DocuSign, Inc. (DOCU) specializes in developing and marketing e-signature technology and solutions that enable businesses to digitally prepare, execute, and act on agreements. It provides cloud-based transaction products and services in the United States and over 180 countries internationally. DOCU has recently released DocuSign Analyzer, the AI-powered contract analytics solution designed for incoming agreements.

DOCU is one of the best-performing stocks in 2020 whose ascent began with the onset of the pandemic. The company has been posting record revenue growth. DOCU is scheduled to announce its fiscal third-quarter results on December 3rd, 2020. In the second quarter ended in July 2020, revenue increased 45% year-over-year to $342.2 million. Billings came in at $405.7 million, growing 61% year-over-year. However, the company reported a loss of $0.35 per share, compared to the year-ago loss of $0.39 per share.

With the increasing demand for remote solutions for agreements, DOCU has gained nearly 187% year-to-date. However, the stock has recently witnessed a major price correction and the uncertainty related to the stock’s continued momentum based on several factors has made our proprietary rating system rate it as “Neutral.”

Here is how our proprietary POWR Ratings system evaluates DOCU:

Trade Grade: C

DOCU is currently trading below its 50-day moving average of $216.24 but above its 200-day moving average of $157.89, indicating that the stock is neither in an uptrend nor in a downtrend. However, the stock’s 8.3% loss over the past month reflects a short-term bearishness.

DOCU’s flagship product, its e-signature service, has over 749,000 customers, use the e-signature as a stand-alone service that can be integrated into existing business workflows. Enterprise and commercial customers have grown 55% year-over-year in the last reported quarter to reach the 99,000-mark. This contributed around 88% to the total revenues and is a tremendous source of future revenue growth.

Buy & Hold Grade: C

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, DOCU’s positioning is not favorable. The stock is currently trading 26.7% below its 52-week high of $290.23.

Looking at the past twelve months, the stock has grown more than 217.3% due to its aggressive capital expenditures and steady growth in the user base. The top-line grew at a CAGR of 40.6% while EPS declined at an average rate of 16.9% in the same period. Over the past year, the company has attracted 212,000 subscription-paying customers, representing a 39% year-over-year gain from the year-ago second quarter.

DOCU has made two key acquisitions this year. In May, the company bought Seal Software, an artificial intelligence, and contracts analytics company, for $188 million. In July, it acquired Liveoak Technologies for $38 million to enhance its remote e-notary service. These two platforms will be integrated into the Agreement Cloud suite of products to enhance the breadth of its offerings.

However, with the incredible run this year, the company seems overvalued by traditional measures. In terms of trailing P/E, DOCU is currently trading at 408.88x, 1,601.2% more expensive than the sector’s median value of 24.03x. Moreover, its trailing P/S of 33.22x is 918.2% higher than the sector’s 3.26x.

Peer Grade: D

DOCU is currently ranked #37 out of 96 stocks in the Software – Application industry. Other popular stocks in the industry are Endava plc (DAVA), Adobe Inc. (ADBE), and Digital Turbine, Inc. (APPS). While APPS beat DOCU by gaining 402.2% year-to-date, DAVA and ADBE returned 43.1% and 40.3%, respectively, over this period.

Industry Rank: B

The Software – Application industry is ranked #11 out of the 123 industries. The companies in this industry design, develop, publish, and support software used to collect, store, report, and analyze data from various operations of a business. Since the onset of the health crisis, remote working, and learning culture amplified the dependence on edge computing and cloud infrastructure. Increased corporate spending on digital transformation is fueling the top-line of the software companies and thus, the industry is thriving.

Overall POWR Rating: C (Neutral)

Despite DOCU’s impressive revenue and user base growth, it is rated a “Neutral,” as the company is still not profitable and is trading at a high valuation, as determined by the four components of our overall POWR Rating.

Bottom Line

The stock has soared so far this year as DOCU’s business model benefited from tailwinds of the stay-at-home trend. However, the positive coronavirus vaccine news caused the high-flying growth stock to an immediate correction. The stock is still being perceived as highly overvalued but the street will be hoping for strength from DOCU as it approaches its next earnings release.

Analyst sentiment, which gives a good sense of a stock’s future price movement, is moderate for DOCU. The average broker rating of 1.42 indicates a modest analyst sentiment. The consensus revenues and EPS for the next year indicates a 31% and 60.3% rise, respectively.

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DOCU shares were trading at $207.73 per share on Friday afternoon, down $4.89 (-2.30%). Year-to-date, DOCU has gained 180.30%, versus a 12.27% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More…

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