Caution: Wait For This Stock to Pullback Before Buying

Many tech stocks have won big during the novel coronavirus pandemic. But few can match the epic run of DocuSign (NASDAQ:DOCU). Since January, shares have soared from around $76 per share, to $167 per share today. And over the past twelve months, the stock has rallied nearly 216%.

But now, with shares just a few dollars shy of their all-time highs, is there more left in the tank?

Yes and no. From the bull’s perspective, there’s good reason why shares could head higher.

As our own Louis Navellier recently put it, “the new normal will be good news for DocuSign.”

Post-pandemic, employers now realize the many benefits of a fully remote workforce.

This could help accelerate the “work-from-home” trend.

Even as the outbreak enters the rearview mirror.

That means a permanent pivot from pen-and-ink to electronic signatures.

On the other hand, you can make a decent bear case for this stock as well.

Mainly due to valuation. The recent run-up means shares are “priced for perfection.” But also, there’s competitive risks to consider. Not only from those already in the electronic signature business, such as Adobe (NASDAQ:ADBE). But, other big tech names as well could enter the scene.

With this in mind, shares may cool off for now after their epic run. But, on a pullback, this newly-minted NASDAQ 100 (NASDAQ:QQQ) component could be a screaming buy.

3 Reasons Why DocuSign Stock Could Head Higher
At first glance, it looks as if most of this company’s growth prospects are already priced into shares. Granted, the easy money has already been made with DOCU stock. Those who bought early, realizing how much of a boon the “stay-at-home” economy would be for the electronic signature giant, saw massive gains these past few months.

Yet, for those looking at the stock today, there are many reasons why shares could head higher.

Firstly, DocuSign’s underlying business remains strong. For the quarter ending Apr 30, the company saw its sales jump 39% from the prior years’ quarter. Next quarter should see as strong, or even stronger performance, given their coronavirus tailwind. But don’t consider today’s strong growth to fall back post-pandemic.

Why? Corporate America’s accelerated adoption of “working-from-home.” Remote working has been a viable alternative for years. But, many companies were cool on the idea. Mainly due to concerns about worker productivity. Yet, recent events have shown that remote worker productivity is as high, if not higher, than the traditional office environment.

So, how does this benefit DocuSign? As business moves from in-person to remote, electronic signature demand will continue to soar. This will help the company meet or exceed its growth projections.

Secondly, the market (for now) remains fully in love with tech stocks. Sure, this could mean we are in the midst of a bubble. But, as tech remains hot, stocks like this one should continue to perform well in the near-term.

Thirdly, DocuSign was recently added to the NASDAQ 100 (NASDAQ:QQQ). Inclusion in tech’s premier index could also help boost valuation.

Yet, while all these factors work in the stock’s favor, there are several risks to keep in mind before buying shares today.

Why Shares Could Head Lower in The Near-Term
As with most high-flyers, valuation is a big concern with DocuSign stock. Shares currently trade at a forward price-to-earnings (P/E) ratio of 348.2. By comparison, rival Adobe trades for 45.1 times forward earnings.

Sure, there’s a major difference in growth between the two companies. Analyst consensus calls for Adobe’s earnings to grow 13.7% between this fiscal year and the next. By comparison, analysts estimate 75% earnings growth for DocuSign over its next fiscal year. With this in mind, a premium valuation is justified.

Yet, is DocuSign’s epic growth sustainable? High competition may limit how much they can scale up. As this commentator recently discussed, the company already competes with Adobe’s Sign application. Also, as InvestorPlace’s Larry Ramer wrote Jun 18, other big tech names could enter the market.

Increased competition will make it very hard for the company to continue growing at such a rapid clip. And if said growth starts to slow, shares could fall significantly lower, as its premium valuation is no longer justified.

Bottom Line: Wait for a Pullback With DocuSign
This stock’s numerous catalysts are equally matched by a bevy of concerns. Between a rich valuation, and high competition, it’s easy to see how shares could fall from today’s prices.

But that’s not to say this is a name you should short. As tech stocks continue to outperform the overall market, it’s too risky to go against the crowd.

However, it may mean DocuSign stock is “too hot to touch” right now. Waiting for a pullback may be the best move.

— Thomas Niel

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Source: Investor Place