On June 2, San Francisco-based electronic signature provider DocuSign (NASDAQ:DOCU) stock hit an all-time high of $152. Year-to-date, DocuSign stock is up over an eye-popping 90%.
As we get ready to finish the first half of 2020, investors are wondering if the bullish momentum in the shares can continue into the rest of the year, too. In the long run, I expect DocuSign stock to see new highs, possibly quite regularly.
However, there is likely to be short-term profit-taking in the shares. If you have a 2-3 year horizon, then you may consider buying the dips.
Q1 Results and DocuSign Stock
DocuSign offers a wide range of products that enable organizations to manage electronic agreements. The group’s initial focus was on providing e-signature solutions. Analysts regard it as the world’s premier electronic signature solution. In 2019, it launched the DocuSign Agreement Cloud platform with an aim to help businesses “automate and connect the entire agreement process.”
On June 4, the firm released Q1 earnings and posted better-than-expected results for its fiscal first quarter ended April 30. Total revenue was $297.0 million, an increase of 39% year-over-year.
CEO Dan Springer’s words summed up how DocuSign is riding the wave of increased demand for e-signature and various digital agreements as a result of the new reality of work-from-home.
“Our strong first-quarter results reflect our ability to help organizations accelerate their digital transformation as they adapt to the changing business environment, magnified by COVID-19,” he said.
For the coming second quarter, management forecasts revenue of $316-$320 million, ahead of analysts’ expectations. Yet following the results, some profit-taking hit DocuSign stock as shares retreaded from the all-time high of %152 toward $130 level.
Long-Term Tailwinds Behind DocuSign Stock
The group believes the potential global market for e-signatures is around $25 billion. When one considers that its annual revenue is around $1 billion, then how much DocuSign can grow becomes quite clear.
DocuSign products are currently used in a broad range of industries and business settings. For example, according to recent research led by Dr. Deepak Gupta of Wayne State University, in hospitals “electronic signatures can be performed in moments’ clicks by physicians signing their contracts, referees providing them references, and practice locations or third-party payers credentialing them recurrently.”
The work-from-home global economy increasingly depends on the ability to create, store, and share accurate records. The company says “agreements signed with DocuSign are legally binding in 180+ countries. You can sign agreements in 43 languages and send them in 13, while complying with specific laws and standards.”
North America is the largest market and expected to stay so during this decade. Yet the group’s impressive global reach is also continuing.
For example, in April 2020, it entered into an agreement with Fuji Xerox which will launch an “Electronic Signature Cloud Service” in order to digitise the contract conclusion process. In a recent interview, Mr. Springer said that only about 2% of Japanese businesses are using e-signature.
Each country is understandably different in terms of market potential and penetration rates. Yet the metrics in Japan could act as a guide to the potential DocuSign has outside of the U.S., too.
Profit-Taking Could Derail DOCU Stock
The group had its IPO and started trading in April 2018 at an opening price of $38. DocuSign stock began 2020 around $75. On March 12, it hit a recent low of $64.88. Now DOCU stock is hovering at$142.
Are you an investor who also follows technical charts? Then you may be interested to know that the short-term technicals point to an overbought picture. Although a stock can stay overbought for a long time, I expect short-term profit-taking to put pressure on DocuSign stock in the coming days.
Investors would like to see the shares go and stay over $150. But short-term traders are likely to keep the stock price between $140 and $125.
Therefore if you have benefited from the recent bull run in DocuSign stock price, you may want to take some money off the table.
Alternatively, you may also consider hedging your position with covered calls. For example, Aug. 21 expiry ATM calls would decrease portfolio volatility and offer investors some downside protection. It’d also enable investors to participate in a potential up move following the earnings release.
Investor Takeaway
Digitizing documents and forms is increasingly gaining importance worldwide. And DocuSign stock will likely be the beneficiary of this trend in the long run. However, in the coming week, the share price may come under some pressure as investors may decide to realize some of their paper gains.
The current price of DOCU stock potentially reflects the positive investor sentiment regarding expected strong growth in the sector.
Long-term investors may regard any dip in the stock price an opportunity to invest in a world-class company.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
