DocuSign (NASDAQ:DOCU) stock is not having a good week as it is down about 9% from high to low. But that’s not the worst of it, because at least this time it is not alone. Wall Street is throwing a fit this week, especially the NASDAQ on Wednesday. The DOCU stock sector is also down big on jitters from rate-hike fears.
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The U.S. Federal Reserve meeting minutes put the fear back into investors. The worry now is that they will be too aggressive trying to control inflation through monetary policy. What’s even worse for DOCU stock is that it created its own drama in November. The stock fell about 42% on a nasty reaction to their earnings report.
It wasn’t so much the actual results that spooked investors, but rather what management said. DOCU actually crushed it delivering a 42% increase in revenue and a 163% year-over-year increase for earnings per share. Maybe their intentions were to under-promise in order to over-deliver next quarter. If that was the case, it backfired big time because investors ran away in panic from the stock.
DOCU Stock Will Mend its Wounds This Year
The correction took DOCU stock back to its May 2020 levels quickly. They didn’t even slow down at $200 per share where they had solid support waiting. This is an indication that the return to the highs is not likely to happen anytime soon.
Most likely, the sell-off may have been too harsh. Nevertheless, it will take a lot of conviction for traders to trust the stock for a while. This was a lot of damage in a short time and it will need that to recover from it. For now, the best case is a fairly steady consolidation between $165 and $132. This will help DOCU stock build a better base to restart an ascending trend.
In the long run, the digitization trend should help it maintain strong demand on services. But investors are right to doubt that future when the company rings its own alarm bells. Sometimes management teams should say less and let the numbers speak more.
From what I see in their financial reports, there’s no evidence of regression. What was damaging was the speed with which Wall Street did it. Growth is alive and well judging by what the profit and loss statement indicates. The average revenue growth for the last four years is almost 40%. Its gross profit is growing at an even faster rate. Clearly, management is not giving itself enough credit. Its report card speaks highly of its efforts.
The Recovery May Take Months
In spite of the steep ramp, the stock is not expensive with a 14.33 price-to-sales ratio. Critics can complain about net losses, but that’s during this growth stage. This is especially true when they generate $320 million in cash flow from their own operations. Management is free to execute on plans without needing to borrow money to exist.
My goal today is not to paint an incredibly bullish thesis for this quarter. The more realistic scenario is for a reasonable recovery rate into the summer. To profit from this, I would use the options markets where I can deploy risk with minimal out-of-pocket expense.
For example, at the close of day yesterday, investors could have collected $4 to sell the March $110 put. This is a bullish position that doesn’t need a rally to profit. In fact, the stock can fall another 23% and still come out a winner.
Everything we discussed today has to work within the confines of the entire stock market. If Wall Street decides that it needs a correction, then there will be more pain in DocuSign stock. This is not my base case assumption now. Therefore, there should be room for it to base and slowly recover to $190 in the next six months.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.
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