UPDATED - September 6, 2019
BotTrigger Trade Alert: $DOCU sold our September $45 / $50 call spread @ $4.80 for a 92% gain from our entry @ $2.50.
DOCU share price is up nearly 20% on the day on the back of yesterday's strong earnings release catapulting the value of our call spread to near the "max-value" threshold of $5. As previous alerts in this vein, we only have .20 cents of upside left on this spread & the risk/reward is no longer there to continue to hold this until expiration. We will be getting back into DOCU on the long side but right now it's time to let this call spread go. DocuSign reported second-quarter revenue of $235.6 million, up 41% year over year. "With revenue growth exceeding 40% and billings growth at 47%, our second quarter performance reflects our clear leadership position in e-signature and increasing adoption of our broader Agreement Cloud offering," said DocuSign CEO Dan Springer in the company's second-quarter earnings release.
UPDATED: June 7, 2019
BotTrigger Trade Alert: DocuSign $DOCU Bought the September 2019 $45 / $50 vertical call spread @ $2.50 for a 3% allocation.
MAX GAIN = $5 for a 100% gain so long as share price trades @ $50 or greater than upon September 20, 2019 expiration
BREAKEVEN = share price @ $47.50
MAX LOSS = occurs if share price is @ or less than $45 per share upon expiration
TECHNICALS:
This gap down earnings reaction is being bought up/absorbed all day so far. Why? We'll get into the fundamental take below but from a technical framework, DOCU just found support on a 7-month long support trend line as illustrated on this daily chart. Coincidentally, not coincidentally this support zone just happens to be the blue flat line which represents the original breakout zone that occurred after a 5-month long bottoming pattern. This is a run of the mill pullback to retest the original breakout zone. These are some of my favorite setups where we get a very convincing bottoming pattern, a breakout from that bottoming phase...which leads to a prolonged rally...then the profit taking stage kicks in as valuation & share price starts converging to median moving averages which inevitably lead to a retest of the original breakout zone. This is almost always where you find the counter rally take place.
But I'm not just banking on a total "V" like recovery off this gap-down. We chose this specific call spread to model for a new base that is likely to take place around this area here in the $40's to $50 area before moving higher. If we get a sharp move higher from here, FINE. We'll take it, out call spread will rapidly appreciate in value. But if we get some more back & fill & sideways actions, then NO PROBLEM ...this call spread will handsomely mitigate time decay and hold a steady value within the $40-$50 range. Notice we're not asking for DOCU to head to the moon to make a 100% gain. All we need here is for share price to merely trade to $50, about $2 higher from it's current area, upon September expiration and we stand to make a 100% gain on the trade. Although nothing in the market is guaranteed, this is what I categorically call a conservative 2x gain trade.
FUNDAMENTALS
DocuSign (DOCU) earnings were perfectly fine yesterday, with what I’d call a “mild beat and raise” quarter — they did beat the expectations by a couple cents on earnings, with 37% year over year revenue growth that would generally be enough to keep investors happy… and they increased their revenue guidance very slightly (by about half a percent), so they still think they’ll bill over a billion dollars this year and will collect most of that in revenues before the year’s out, which is pretty impressive.
It doesn’t make DOCU cheap, of course — this is still an $8 billion company, so that’s a price/sales ratio of about 8, and they’re profitable on an adjusted basis but not dramatically so — the shares are trading now at about 63X FY2022 earnings (that’s calendar year 2021, but still). So that means investors look for chinks in the armor, or signs that growth might slow down — and it seems that they found that in the billings and the billings guidance. In the past the billings number has been a stronger “beat” than the actual revenue number, signaling that the company is signing new business faster than they’re raising revenue, which is encouraging, and now those two numbers, at least for this quarter and the second quarter guidance, are more in line with each other.
Whether that’s a real sign that billings are slowing down, or just a hiccup caused, in part, by the fact that they’re rolling out new updates to the software this quarter and selling the more complex “Agreement Cloud” offerings, or just by a little softness caused by the uncertainty that everyone seems to be feeling and that might be making customers a little slower to place orders… I don’t know. That’s all guessing, but investors crave a narrative and the narrative here seems to be “the billings aren’t blowing out with surprises any more, so maybe subscription growth is slowing.”
The company’s explanation is mostly “the products are getting more complex, and the sales cycle is longer” — this is from the conference call transcript:
“First quarter billings increased 27% year-over-year to $215 million included in this growth with a strong starting customers’ purchasing multi-product solutions of e-signature together with document generation and CLM products. Multi-product sales involved more complexity in terms of integration designs and related SOW. This very positive motion in our business also elongated some of our upsell cycles this quarter, for existing customers wanting to deploy our expanded offerings. This extended sales cycle impacted our billings in dollar net retention in Q1.”
I like the company because they’ve really pioneered their e-signature space and are broadening their sales offering to document and contract management with that DocuSign Agreement Cloud, and I think they have a chance to either become a leader in that broader space or get taken over by one of the major document management players at a nice premium (Adobe, Salesforce or Microsoft would be the logical possibles that come to mind, though one never knows).
There are other concerns we can visualize with DocuSign, like the fact that realtors make up a lot of their customer base so they’re subject to some risk if the housing market takes a tumble, but e-signatures are a growing trend with obvious convenience advantages and better traceability, so the main risk that worries me is still competition… from those same players like Adobe who also offer their own e-signature solutions, though the specifics vary, and from smaller companies with competing offerings.
But when you’re worried about competition and big picture stuff, it’s also important to let the numbers guide you — DocuSign increased its customer count by 20% year over year, subscription revenue grew by 37%, and their net retention, in dollar terms, was 112% (meaning that their customers not only stuck around, but spent more). We don’t know for sure whether they’re taking market share, since the market is huge and changing quickly for these products, but we do know they’re doing very well.
Cash flow is also improving, so on an annualized basis DOCU now trades at about 65X free cash flow — which is not bad for a company that’s likely to grow revenue at 30-40% a year. It’s not “cheap,” of course, and some of that cash flow appeal comes from the fact that a substantial amount of employee compensation is share-based, but, well, it’s cheaper today than it was yesterday, and the stock is back down near my cost basis thanks to the ~20% drop, so I added a few shares.
This is still a small position, still speculative, still subject to competition — and it will probably remain quite volatile, like all of its richly-valued “cloud SaaS” friends, even though compared to many of them it looks like a near-bargain at “only” 8X sales… partly that’s because of the competition and the perception of the size of their end market, but I think odds are pretty good that they’ll remain in the lead, and they’re well-financed enough (with nearly a billion dollars in cash and investments) to beat out all of the smaller competitors.
UPDATED: May 31, 2019
BotTrigger Trade Alert: $DOCU sold our June $55 strike calls here @ $3.00.
The technical setup looks very bullish with accelerated volume coming in here @ the top range whilst DOCU is retesting the resistance breakout zone now on it's 3rd revisit, which is usually where buying pressure is likely to take out supply and breakout into a higher trading range. Despite the setup, these calls expire too close to the wire on June 21st which means we can't afford to be wrong this close to expiration. Given the current market headlines & the erratic wild card nature of Trump-tweets, market is liable to increase cash until more certainty is fleshed out. The headlines are not bull friendly right now, so although we're due for a big bounce, the broader markets don't appear ready to bottom yet. The broader market indices are all trading near their 200 day MAs yet nothing in the trading action suggests that any of them are ready to rally. We just haven't seen any sort of capitulatory selling event where the $VIX spikes to overbought territory and way above the upper bollinger bands, for example. We almost got that type of selling yesterday, but it didn't quite get there. We'll be dissecting the quality of the next bounce that occurs as that will give us more color on whether or not the market will be cultivating a formidable HIGHER LOW or we're about to enter a prolonged bearish period. As we noted on yesterday's QQQ chart we've broken below a head & shoulders pattern but it's not the break below that signals a bear market period but rather a failed ability to reclaim above the neckline
ORIGINAL POST: April 16, 2019
BotTrigger Trade Alert: $DOCU bought the June 17th $55 strike call options here @ $4.30 for a 5% allocation size.
Again green volume bars are stronger in each uptick vs the relative consolidation and pullback cycles which have been shallow & occuring on lower volume. We're $5 dollars away from DOCU's all time high print of $59.62. The stock is not up here on those strong volume bars to trend south. This is a northbound trending stock BUILDING CAUSE TO HEAD HIGHER.
We may get another small pullback or a quick downwards bar in the very near term time frame, but the macro trend on this setup is one that WANTS HIGHER. We have a bullish crossover occuring on both the MACD & Stochastics momentum oscillators occurring on both the daily & 2-day time frame. What's more, we have a HARD buy signal on the BotTrigger Buy/Sell Signal occurring on thrice the 1-day, 2-day & 3-day time frame. I'm not going to argue with that alignment. For your viewing pleasure, all 3 HARD BUY SIGNALS have been posted on the Members blog. Take notice of the bullish crossover on both the 1-day & 2-day. The 3-day is in the midst of curling bullish but has not yet...keep in the mind the 3-day is always going to be more delayed than a nearer term time frame.
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