Shares of DocuSign (NASDAQ: DOCU)
finished last week at all-time highs after smashing analyst estimates for their earnings and revenue in their Q3 report which was released after Thursday’s session. This comes after upward guidance from management at their last quarterly release in September and Wall Street looks only too happy to reward them for delivering on their promise.
Even though September’s report showed a missed for EPS, the fresh forward guidance presented at the time sent the stock up 20% as investors licked their chops and rubbed their hands with glee. Shares never looked back and are now up a full 60% since then.
In keeping with the forward momentum, Thursday’s report registered a non-GAAP EPS of $0.11 which was well above estimates for $0.04 while revenue was up 40% year on year. Management wasn’t slow with offering fresh upward revision to their forward guidance for revenue in the next quarter and investors will be loathe to bet against them delivering again.
Learning to Walk and Run
Having IPO’d in the first half of 2018, the electronic signature company’s stock (and it’s investors) endured a baptism of fire in the public markets. In its first 12 months, it saw an 80% rally, a 90% fall and a 70% rally. Many of these moves were centered around earnings reports and as management appears to be building a history of consistently beating estimates, shares become more and more attractive to the upside.
Indeed Citi was one of the first out the blocks on Friday as they increased their price target $72 to $85, citing continued subscription growth and the much desirable recurring revenue it brings as the underlying driver. Investment house William Blair shared similar sentiments when they noted they “continue to see a path for the company to grow subscription revenue 25% or higher over the next three to five years while expanding margins to the mid-20% level”.
Disrupting the centuries-old industry of paper contracts has been a ripe market for tech. Software giant Adobe Systems (NASDAQ: ADBE) began their foray into the space with an acquisition of EchoSign in 2011. Their current product, Adobe Sign, is a leading competitor to DocuSign as is HelloSign, which was itself acquired by cloud giant Dropbox (NASDAQ: DBX) earlier this year. For now, though, DocuSign remains the only company whose bread and butter is the e-signature market and it’s well-positioned to continue gaining market share as we head for 2020.
Management seems eager to keep moving forward, and paid $220 million for SpringCM, a cloud platform for contract management, in 2018 to bolster their own offerings. The company is putting all its weight behind creating, owning and growing the ‘Agreement Cloud’ market - its self-styled suite of software tools that will cover every conceivable type of agreement or contract a company could have to make.
While there’s nothing wrong or worrying about management regularly raising guidance and then beating it, it does make the stock susceptible to any earnings report miss down the line. Even lukewarm, ‘good but not good enough’ numbers could spook investors and we’ve seen what can happen when DocuSign stock loses its appeal.
That said, shares are entering blue sky territory having passed 2018’s double top levels late last month. Friday’s session did give shares a wobble and they initially retraced much of the opening gap up. However, they caught a strong bid into the close and finished at session’s highs. This kind of action coupled with the internal momentum that management is providing is very promising.
One thing to be conscious of is the stock’s RSI which is hovering around 70. This indicates that shares are leaning towards being overbought and while it doesn’t mean they can’t go higher, it can make some profit-taking driven selling in the near future more likely than not. Read more about RSI and how to trade with it here. There’s a rising trend line for investors to aim entries or stops at and a solid looking support line at $67, built on 2018’s highs.
All things considered though, DocuSign is an industry leader that’s been talking the talk and walking the walk in recent months - there’s no reason to think they’ll stop anytime soon.
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