Thesis

DocuSign (DOCU) has been a COVID beneficiary as investors realize that virtual signings have been accelerated. DocuSign relies on the real estate industry and a few other verticals for growth, and has expanded its product set to deepen workflows.

The stock has not enjoyed the same rally as other high growth software names and it is one of the best run software companies from a cost perspective. I recommend playing into the earnings print on Thursday via long stock and monthly call options. I believe the Company will beat expectations and guide above the Street based on new product launches, continued expansion in existing markets, and TAM expansion.

Brand Asset Guidelines | DocuSign

Source: DocuSign

Earnings

DocuSign reports on Thursday 12/3 after the close, which I believe presents a good opportunity to buy. Historically, the stock has outperformed expectations. The recent underperformance in the last quarter has weighed on the stock too much.

Source: Nasdaq

Further, looking at earnings revisions, the Company has held flat its forecasts over time with very few revisions. This presents an opportunity to have a view that is divergent from the Street.

Source: Nasdaq

Financials

DocuSign is a well run, balanced growth company that is benefitting from COVID. One of the core parts of the financial thesis here is that people will not go back to paper and pen signing once they have tried DocuSign. This will result in higher than expected upsell from free to paid, upsell within the tiers, and new product traction like notary and other premium workflow tools.

DocuSign is also pushing longer contracts and bigger terms to get more visibility. I believe the nature of the workflows will make this revenue driver productive. One of the key indicators here is getting more contracts over the 12 month mark and having subscription continue to be above 90%. This stability in the revenue base gives me confidence that the earnings report on Thursday will be positive.

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Source: DocuSign Investor Relations

Our Contrarian View

My investment approach is based on social signals, fundamental valuation, and technical support. Looking at Estimize, which crowdsources estimate earnings for various companies, shows that the crowd expects DocuSign to handily beat EPS and revenue estimates for the next quarter. My fundamental model also shows a beat on new accounts and upsell, although I am more muted on S&M expense for the recent quarter.

Source: Estimize

Further, on a revenue basis, my model shows an output of $370m, beating the Street consensus and in line with Estimize estimates. I believe this will be the biggest driver of upside performance in the upcoming quarter.

Source: Estimize

Looking at analyst estimates, the Street is currently showing that the stock is underpriced, which presents a good opportunity for investors to realize this underappreciation. My models also show 15% potential pop on the print.

Source: TipRanks

How to Execute

Based on these findings, I am long DocuSign stock and will also initiate a call option with monthly expiration. I am looking at near the money call options for Dec. 4 and 18 expiration dates. I will build this position before the print in order to capture the upside and also to avoid long-term theta decay.

On the stock position, I am building a 5%-10% position of the portfolio into the print that I intend to hold for the long term. This way, I can capture upside in the short term and medium term.

Valuation

I look at an adjusted growth multiple for tech companies – I believe all valuations are relative and must be taken into context with low interest rates, a search for growth, and year end volume thinness and retail. Looking at DocuSign versus peers that are growing at 40%+ YoY and with decent efficiency metrics, we can see that DocuSign trades at 0.71x growth adjusted EV/NTM revenue, versus a cohort average of 0.97x. If we take the group average and apply it to DocuSign, it results in 36% upside. If we take a 30% haircut to that multiple approach, we still get to a 28% upside case.

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Source: Meritech

Combined with a multiple approach and a look at how analysts are valuing the company on a fundamental level, I get to an upside of 15%. Combining these two valuation methods gets me to an upside case of 20% from today’s figures.

Source: TipRanks

Looking at the follow through from Zoom (NASDAQ:ZM) earnings, I could see DocuSign easily beating numbers and the stock jumping 5%+ on the print. We may finally see some RSI on the name and return to the stock being one of the loved COVID winners. I believe it is the right time to get in from a valuation perspective and with the upcoming earnings catalyst.

Risks

One risk is mis-sizing the option plays versus the medium term stock hold. If the stock misses, the options may expire worthless and that has to be considered in the sizing of both positions. I will initiate a 10% of the total position in options to account for this. I will initiate the rest of the 90% position in stock, which I already own. I aim to keep these positions between 5%-10% of the total portfolio.

Another risk is that DocuSign has lagged the general COVID leaders for the past month or so. It could be a sign that the company is about to miss earnings, or that it is viewed less favorably. Personally, for such a well run company, I view these moments as buying opportunities.

Another risk is conservative guidance. DocuSign may be accounting for a return to normalcy faster than anticipated, or the markets may not like sub 30% revenue growth, which is a possibility into next year. Based on Zoom guidance, the work from home beacon, I do not see this being an issue for DocuSign, which is heavily embedded in customer workflows and also relies on upsell to get to its quarterly targets.

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Disclosure: I am/we are long DOCU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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