Back in mid-June, I recommended a long position in e-signature up-and-comer DocuSign (NASDAQ:DOCU). I then reiterated by bullish stance on DocuSign stock in early July. Hopefully you’ve profited from those calls as the shares traded very close to their peak price at the end of July.
It’s perfectly okay to change one’s outlook on a stock after some time has passed. Shifting from strongly bullish to short-term cautious isn’t inconsistent. Rather, it’s something that all market participants should do frequently: reevaluate positions based on changing circumstances.
So, what’s changed during the summer’s back half? InvestorPlace contributor Luke Lango’s recent article title sums it up succinctly: “DocuSign Is a Great Company, But the Stock Is Overvalued” – and cautious investors should now adjust their positions accordingly.
A Closer Look at DocuSign Stock
The exuberance over the work-from-home trade can be clearly seen in DocuSign stock’s price action. Prior to 2020, the stock posted modest gains but nothing to write home about.
Then the onset of the novel coronavirus happened and market participants furiously bid up DocuSign stock. By July’s end, the share price had ascended from around $76 to $216 and change.
When we consider that the stock’s 52-week low price is just $43.13, this makes the surge all the more astonishing. Has it been too much, too fast?
Valuation metrics suggest that the price increase might indeed be overstated. It’s worrisome that DocuSign stock’s trailing 12-month earnings per share is -$1.17. And due to the negative earnings per share, the stock has no price-to-earnings ratio on a trailing 12-month basis.
Be Wary of Mega-Trends
DocuSign reminds me a lot of Teladoc Health (NYSE:TDOC), which is also fiercely trending. If you’re starting to get the feeling that novice traders are bidding up shares of any company involved with electronic records, you might be on to something.
Have you noticed that the so-called Robinhood crowd stopped buzzing so much about Hertz (NYSE:HTZ) lately? It seems like they’ve abandoned that company in favor of a new flavor of the month.
I’m referring to Eastman Kodak (NYSE:KODK), a company that hardly anybody cared about until recently. Now, it’s the darling of social-media commentators and the daily trading volume has shot through the roof.
And, the price has fallen considerably in both stocks: first Hertz, then Eastman Kodak. Unless your timing is uncanny, chasing after mega-trends usually doesn’t pay in the long run.
I’m concerned that as the nation rebuilds and strives to achieve some sense of normalcy, the work-from-home hype trade will subside. The attention could be drawn away from DocuSign. Stock traders and commentators are a fickle bunch, after all.
Growth Rates Have Their Limits
It’s important to differentiate between growth and the rate of growth. A company can expand for years without interruption, but the pace of that expansion isn’t likely to increase without limits.
Going forward, this distinction could apply to DocuSign. The company’s first fiscal quarter set a pace that will be very difficult to maintain.
Let’s take a moment to check the year-over-year growth rates for that quarter:
- Total customers up 30%
- Enterprise and commercial customers up 49%
- Billings up 59%
- Revenues up 39%
It’s tempting to view this as entirely positive, but there’s a dark side to exponential growth rates. When expectations run high, disappointment can follow in the upcoming quarters as the pace can’t likely be maintained.
The Bottom Line
This won’t be a popular view, but I’d like to challenge you to consider that perhaps DocuSign stock has gotten ahead of itself. This is not to imply that there’s something inherently wrong with the company.
Rather, it’s only a call for clear-headed thinking during what might be the peak of the work-at-home trade. The last thing we need is for more people to latch on to another mega-trend, only to end up on the losing end of it.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.