If you’re looking for the ultimate play on the novel coronavirus, it could very well be DocuSign (NASDAQ:DOCU). After tumbling in March due to the initial onset of the crisis, DocuSign stock finds itself as one of the top outperformers among major larger-capitalized investments. Shares are up 132% year to date.
Frankly, it’s not hard to see why Wall Street loves the electronic agreement management company. Like Teladoc Health (NYSE:TDOC), both businesses convert elements of physical, face-to-face interactions into the digital age.
From a pure convenience standpoint, DocuSign stock is a winner. But with the Covid-19 pandemic emphasizing social distancing, any platform that could replace in-person communications with digital alternatives found tremendous enthusiasm.
It’s important to realize, though, that DOCU is more than just a play on the coronavirus. Well before we accepted our new normal of face masks and buying gallons and gallons of hand sanitizers, hospitals across the U.S. were overloaded with paperwork involving various regulatory guidelines.
According to an October 2017 report by the American Hospital Association, “an average-sized community hospital spends nearly $7.6 million annually to support compliance with the reviewed federal regulations.”
This, of course, leads to doctors getting distracted by paperwork as opposed to caring for patients.
In any environment, you want medical professionals purely focused on their patients. But that’s especially so during an unprecedented pandemic. Thus, DocuSign stock only spent a few sessions below parity for the year. Simply, the underlying company is too important to be in the doldrums for an extended period.
But does that mean DOCU is a buy right now? To be clear, this is a balancing act. Let me explain.
A Little Patience May Be More Rewarding for DocuSign Stock
If you don’t want to hear about balancing acts, I completely understand. Since the beginning of April, DocuSign stock has doubled in market value. And with Covid-19 cases surging to new daily infections records, the fundamental case seems patently obvious: buy now or regret it later.
Politically and socially, I can further appreciate the bullish argument. From one angle, the Trump administration appears either inept or unwilling to do anything about the crisis. Instead, we’re treated to some shockingly tone-deaf social media posts. Also, it doesn’t quite help that the White House is almost incentivized not to talk about the pandemic; otherwise, the mainstream media will be all over the seemingly slow reactions.
On the social front, you have continued calls for law enforcement reform and justice. Fueling the unrest is the less-than-stellar labor market, which is still seeing new filings for unemployment benefits in the millions. Big crowds of angry people who aren’t practicing social distancing? That seems the perfect recipe for the coronavirus and cynically for DocuSign stock.
While this logic makes perfect sense, it’s also possible that DOCU has priced in this narrative. Primarily, while the daily average has spiked up, we don’t know how this translates to Covid-19 deaths. Based on new daily coronavirus-related deaths, fatalities have declined significantly from their April peaks.
Also, the cumulative total of fatalities is beginning to flatten, unlike the cumulative total of cases. On the surface, this suggests that the magnitude of this resurgence is lower than the first round.
We’ll find out if this turns out to be true. However, I’m not in a hurry to jump aboard DOCU, even if it has a fundamentally sound business (which in my opinion it does). With momentum so hot, there’s a chance to be disappointed.
Treat DOCU Like a ‘Slow Burn’
Another reason to stay skeptical about DocuSign stock in the near term is the economic reality associated with the coronavirus. Likely, everyone across the political aisle can agree that we should do our best to avoid another lockdown.
This is going to sound callous, but you have to look at the stats. Even if 50,000 people in this country got infected over the next 180 days, that amounts to 9 million Americans. That’s roughly 3% of the population. And how many of those 9 million would turn out to be serious cases?
It’s hard to say for sure. However, a risk exists that people are getting sucked into the media hype and the barrage of doom and gloom. If investors find that this coronavirus resurgence isn’t all that it was cracked up to be, you could see a huge selloff.
Remember, for DocuSign stock to have the biggest coronavirus-related benefit, we need to see dramatically higher hospitalizations, not just nominal cases, which can range from asymptomatic to severe.
That said, the protocols of the new normal will likely stay with us for some time. For instance, a Harvard study suggests that social distancing may be needed until 2022. If so, you’re going to want DOCU stock but not at this price.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.