DocuSign and The Case for 66% Upside

Key Points

• Shares of DocuSign have been rallying since November and the recovery rally continues to gain steam.
• A run of good earnings, a bullish outlook and analyst upgrades have given the stock a lot of momentum, and it looks like it will continue.
• Last week saw a fresh analyst upgrade, suggesting there's still more than 60% of upside to be realized from current levels.

With as much as a 60% gain since November, you might think that shares of DocuSign, Inc. NASDAQ: DOCU were back to their former glory.

An optimist would say that's not a rally to be sniffed at, and there are plenty of signs that it's only getting started. A pessimist, however, would point out that shares are trading down more than 80% from their pandemic-inspired high in 2021 and are currently trading only marginally higher than where they IPO'd in 2018. This is all true, of course, but Wall Street is nothing if not forward-looking, and a stock can only be judged on its performance.

Bullish Tailwinds

There is no doubt that DocuSign is doing well. Last month's Q4 earnings from the e-signature software company crushed analyst expectations, while forward guidance from management came in hot as well. The general consensus is that the company had made it through the worst of the storm, was more than justifying the rally in its share price (that started in November), and currently has enough tailwinds to further gains.

Analysts were impressed by the significant momentum in DocuSign's AI product portfolio, which should lend itself to strong, profitable growth through 2025. There was also a welcome shift in management's approach to margin expansion, something every investor likes to hear. There were several bullish upgrades and comments in the wake of the report, which helped fuel even more gains, and this trend has continued into April. 

Recent Analyst Upgrades

Last week, Citi named DocuSign a top stock in its Value Creators Focus List, giving it a fresh price target of $93. The fact that equities, in general, are sliding this week has only made that more attractive and could support an upside of some 66% from where shares closed on Monday. JMP Securities also got in on the action, reiterating their Outperform rating last week, their price target of $84 only marginally less bullish than Citi. If DocuSign shares hit either target in the coming weeks, they'd be at their highest levels in over two years.

It should be noted that some analysts still haven't come out on the bull side yet and are instead urging caution. For example, the Royal Bank of Canada rated Docusign a Neutral Sector Perform last week, echoing the Hold rating that Needham gave to the stock around the same time. And while UBS upgraded Docusign, it was from Sell to Neutral.

Considering a Position

The combination of analysts' bullish, yet somewhat cautious, stance might be off-putting for some, especially as DocuSign started the week with a 3.5% drop. To be fair, this seems to be a case of falling with the broader market, as both the benchmark S&P 500 and NASDAQ indices are suffering from a surprise pop in inflation. 

But there's nothing new here; we've been through the inflation story before. Broadly speaking, the Fed has managed to thread the needle, and while there will be bumps along the way, like what we're seeing now, all signs point to inflation being under control. There's no reason to think there'll be too much of a dimming on the risk-on sentiment, which has helped stocks like DocuSign so much, and investors should be watching closely to see what kind of entry opportunity is opening up.