This Beaten Down Stock Just Flashed 2 Buy Signals

Key Points

• DocuSign shares endured a 90% selloff despite once being the darling of tech stocks.
• But shares have been consolidating for the past year and the bears have run out of steam.
• Last night’s report looks set to have given the green light on a comeback rally.  

DocuSign Inc NASDAQ: DOCU, the name perhaps most synonymous with the pandemic-fueled tech bubble, and a stock that knows what it’s like to rally 400% and then shed 90% of its value. Whether you rode it up or got caught in the selloff, you've almost certainly heard of them, and in recent months, probably for not the right reasons. 

Shares of the e-signature platform have been languishing near all-time lows for the past year as two eye-watering headwinds have converged to create what, at times, must feel like unrelenting pressure on the bid. The first is macro-focused and has hurt a lot of tech companies.

It’s the rising interest rate cycle that’s been in play now for some time, with the Fed pushing interest rates higher and higher in a bid to cool inflation. While it’s starting to look like they’ve managed to thread the needle on that one, it’s made unprofitable tech companies very unattractive to investors. 

Fundamental Headwinds

The reason for this is that while a company can register impressive year-on-year revenue growth, getting to consistent profitability takes time, and that means a long runway of cash. When interest rates were at or near 0%, money was cheap, and investors could be confident that companies like DocuSign were able to borrow their way to profitability effectively.

But the removal of cheap money has made that all but impossible for the foreseeable, especially when matched with the second headwind. 

This year has seen numerous headlines covering the great migration back to the office from remote working. Many companies are now insisting that employees show up for at least three days a week and are tying parts of their compensation to this. Like with Zoom Video Communications Inc NASDAQ: ZM, this is a reversal of the trend that once made DocuSign an absolute must-have platform for any business that wanted to survive the pandemic. 

But despite having to navigate a completely different landscape and despite their shares being a shadow of their former selves, all is not lost. DocuSign reported its Q2 earnings last night, which flashed two very strong buy signals. 

Return to Profitability

The first was from the headline numbers. Both topline revenue and bottom-line EPS smashed analyst expectations, with the former showing year-on-year growth of 10% and the latter registering its second-best print ever. If you’ve been on the sidelines watching Docusign and waiting for the right time to get involved with a comeback rally, this could be it. 

Even those quarterly reports from the glory days of 2020 and 2021 always had the earnings numbers in red ink, but DocuSign seems to have switched them out for black ink for good. To see the company deliver what is now three quarters in a row of profits, albeit just, with June's EPS a flat $0.00. It's just a pity it took a 90% selloff to get them there. 

The other buy signal made even more potent by the profitable run of quarters is the company share repurchase program. This caught our eye when announced last year as DocuSign shares continued to slide back towards their 2018 IPO levels and all-time lows; at the time, it's not exactly when you’d expect the management of a tech stock to be so bullish.

But to their credit, the bears have since wholly run out of steam, and the glass-half-full investor will point to the fact that shares have rallied as much as 75% from those lows. 

Putting Your Money Where Your Mouth Is

A share repurchase program is one of the most bullish signals a company can give to investors and tells them that they believe the stock is trading so far below what they believe fair value is that they’re willing to buy the shares themselves. Last night's report saw DocuSign add to last year’s program for the first time, an indication of management’s confidence that the current trend is set to continue.

DocuSign shares jumped 3% in the after-hours session and will be closely watched today for further upside action as we head into the weekend. They’re still trading down near all-time lows, but more importantly, they’ve been consolidating for a full year now. The bears haven’t been able to take them lower and are unlikely to do so for the foreseeable after last night’s report.

For those of us on the sidelines, this could be the perfect time to start backing up the truck. e foreseeable, as last week's beat and surprisingly strong outlook force a full re-pricing. We know from past performance what this can mean with Lululemon stock, and we don't expect this time to be any different.