Buy Docusign (NASDAQ: DOCU) Before The Next Leg In The Rally

After a blistering 250% run from March through August, shares of e-signature giant DocuSign (NASDAQ: DOCU) have been consolidating and trading mostly sideways since. A brief pop on the back of their fiscal Q2 earnings in September had them up nearly 350% from March’s lows but they retraced that fairly quickly and have fallen back in line.

In a lot of ways, this kind of consolidation is a good thing as it means Wall Street and investors alike believe the company has hit a new level of maturity and has drawn a fresh line in the sand. In other words, there’s a new ‘normal’ from which to base further rallies from. DocuSign have also set a new high bar for themselves in terms of quarterly numbers, as September’s report showed year on year revenue growth of 45%.

Favorable Conditions

While things had been going well for the $40 billion company prior to COVID, the surge seen in the work-from-home economy did wonders for them. Many companies had already started or were in the process of transitioning to electronic signatures over wet ink, but with offices around the country shut almost overnight DocuSign’s services became an urgent must-have rather than a nice-to-have.

Eight months later, there’s still huge potential ahead for them as we round the corner into 2021. As their CEO Dan Springer said with September’s report, “we are just scratching the surface of our Agreement Cloud opportunity and believe we are increasingly becoming an essential cloud-software platform for organizations of all sizes".

Shares have seen solid support around the $190-$200 level since the summer, bouncing off it several times as buyers are to be found with each dip. With a few weeks left in the year, there’s a sense that fresh momentum is starting to be generated by the sell-side that could have them testing resistance around the $240 mark by Christmas.

On Tuesday of this week, we learned that Lone Pine Capital, who manage a $24 billion portfolio, have recently initiated a fresh position in DocuSign shares. And we’ve also heard from Kirk Materne at Evercore on how the recent election results are likely to be particularly bullish for certain tech names. Due to the prospect of a split government, the risk of an increase in corporate tax rates has been significantly reduced. This is both good for DocuSign as an entity and for their customers, many of whom are in the SMB space and working with tight budgets.

Fresh Upgrades

At the start of the month, a fresh upgrade from Baird meant the bulls had a new voice. They moved shares to Outperform and gave them a price target of $280 which suggests upside in the range of 30% from where shares closed last night. Baird analyst William Power noted at the time that "while COVID-19 and the resulting work from anywhere environment has been a clear catalyst, we believe the benefits and drivers of digital transformation are here to stay well past the pandemic." He’s particularly bullish on DocuSign’s growth rate versus its SaaS peers as well as its strong market position.

Interestingly for investors sizing up the opportunity now, DocuSign shares are trading below where they were when Baird upgraded them and below where they were when Morgan Stanley upgraded them in October. In fact they’re just coming off a test of the $200 level which they’ve hit seven times in the past three weeks, and there’s a sense that they’re ready to start testing upside resistance instead.

While the share price momentum might have definitely cooled in recent months, we’re still talking about a company growing revenue close to 50% year on year and that has gross margins of 78%. In their most recent earnings report, management raised full year guidance and given shares are marginally below where they were then, you can’t help but feel there’s a bargain to be had at these prices.