DocuSign (DOCU) is a leading provider of eSignatures and related solutions
Shares plunged in mid-November on weaker Q4 management guidance
Wall Street's consensus outlook is bullish, with price expected to rise more than 50% in 12 months
The Market Implied Outlook (calculated from option prices) is bearish through 2022
With the substantial disagreement between the market and the analysts, I compromise on a neutral rating for DOCU
DocuSign (NASDAQ:) boomed during the pandemic as demand for e-signatures and related document management services skyrocketed. As companies returned to some measure of normalcy, investors became more cautious.
Since reaching a YTD high close of $310.05 on Sept. 3, the DOCU had fallen in the month prior to reporting Q3, dropping 24.6% to finish at $233 .82 on Dec. 2. Reporting after hours of trading on Dec. 2, the company beat consensus estimates for EPS and Q3 sales, but management's Q4 sales forecast was lower than expected and shares fell dramatically. DOCU is currently trading at $144.48, down 35% for the YTD and down 47.9% over the past three months.
DOCU 12-Month Price History
Source : Investing.com
DocuSign CEO Dan Springer said the weaker growth outlook was due to a faster-than-expected recovery from pandemic-driven remote working conditions.
For a high-growth company like DOCU, valuation is highly dependent on earnings growth forecasts. A review of management guidelines could significantly shift the share price. Still, it was surprising to see the 42% drop in one day. Because so much of DOCU's value depends on market expectations rather than current results, it is important to be aware of the overall picture of the market. . It is especially important to look at the consensus outlook, as well as the dispersion among individual analysts and traders.
The consensus outlook of Wall Street analysts is widely followed. Another place to measure market expectations is options trading. The price of an option on a stock reflects the market's consensus estimate of the probability that the stock will rise above (call option) or below (put option) (the strike price) between now and when the option expires.
By By analyzing the prices of call and put options at a range of strike prices, it is possible to construct a probabilistic price forecast that reconciles all option prices. This is called the market implied outlook and represents the consensus view between buyers and sellers of options on the stock. This approach to inferring market expectations is well established in quantitative finance.
I calculated the market implied outlook for DOCU through 2022 and compared it to the consensus outlook of Wall Street analysts. While consensus forecasts combine the views of those whose predictions will be more accurate with those who will be less accurate, a wide range of research concludes that consensus estimates are often the best basis for decisions. Wall Street Analyst Outlook for DOCU
E-Trade calculates the Wall Street consensus outlook for DOCU based on the opinions of 15 ranked analysts who have published ratings and price targets in the past 90 days. The consensus rating for DOCU is bullish, as it has been throughout the year, and the consensus price target for 12 months is $212.75, 47.25% above the current share price. Even the lowest price target is 17.66% above the current level. There is a high degree of dispersion among analysts' forecasts, and this diminishes confidence in the predictive value of the consensus. Trade
Investing.com calculates Wall Street's consensus outlook by pooling the views of 20 analysts. The consensus rating is bullish and the 12 month consensus price target is 60.4% above the current price. As with E-Trade's consensus, there is a high degree of spread between the price targets.
If there is recent material information affecting the outlook for a stock, consensus estimates may be slightly outdated. This is definitely a consideration for DOCU. While there have been a number of downgrades since Dec. 2, a 90-day period for ratings may include those issued prior to the recent announcement. That said, with ten days since the news, one would hope that analysts looking to change their ratings or price targets would have done so by now.
Wall Street's consensus outlook for DOCU over the next 12 months is bullish, with gains expected at 50% or more, but the spread in individual price targets diminishes confidence in the consensus outlook. implied outlook for DOCU through mid-2022 (using options expiring on June 17, 2022) and through the end of 2022 (using options expiring on January 20, 2022).
The standard presentation of the market implicit outlook is in the form of a probability distribution of price return, with probability on the vertical axis and return on the horizontal.
DOCU Market-implied price return opportunities from now to June 17, 2022
Source: Author's calculations using quotes for options m E-Trade
The market-implied outlook for DOCU through mid-2022 is significant skewed, with the highest probabilities corresponding to negative returns. The well-defined peak probability is a return of -20% for this period. The annualized volatility calculated on the basis of this distribution is 57%. This is a bearish outlook.
Another way to view the market-implied outlook is to rotate the negative return side of the distribution around the vertical axis (see chart below).
DOCU Market- Opportunities for Implicit Price Returns from Now to June 17, 2022
Source: Author's calculations using option quotes from E-Trade. The negative return side of the distribution is rotated about the vertical axis.
This view highlights the asymmetry in probabilities between positive and negative returns of the same magnitude. The probability of negative returns is significantly higher than for positive returns of the same magnitude across a wide range of the most likely outcomes (the red dotted line is well above the solid blue line on the left of the chart). However, the probability of extremely large positive outcomes is greater than for positive returns of the same magnitude. 2022. The odds strongly favor price declines over gains. The peak probability corresponds to a price return of -27% and the annualized volatility is 52%. This is a bearish outlook for 2022. As expected for a stock with such a high positive skew, there is a fat tail which favors very large positive returns, although they occur with a very low overall probability. DOCU Market -Implied Price Return Probability from now to January 20, 2023
Source: Author's calculations using option quotes from E-Trade. The negative return side of the distribution is rotated around the vertical axis.
The market implied outlook for DOCU matches what I calculated for a range of riskier growth stocks. There is a high probability of losing money along with a low probability of very large winnings. This type of highly skewed bet is common with the type of stock Cathie Wood prefers. I've obtained similar market outlooks for, for example, Teladoc (NYSE:) (in February and July), Peloton (NASDAQ:) (in February and September) Zoom Video (NASDAQ:) (end of November).
Summary
DOCU is an innovation growth story and a leader in e-signatures and contract management. The company enjoyed a huge windfall from the COVID pandemic, but that accelerated growth appears to be slowing down. Wall Street's consensus outlook remains bullish, although a number of analysts have downgraded the stock and lowered its price targets.
Thanks to the massive decline in the share price since Dec. DOCU is about 50% above the current price. By contrast, the market implied outlook, which represents the consensus view of the options market, is substantially bearish.
The most likely price return for the period from now to June 2022 is -20%. The most likely price return through January 2023 is -27%. Especially given DOCU's high volatility, the range of plausible returns is wide. With the significant discrepancy between the analyst consensus and the market-implied outlook, I'm making a compromise on a neutral rating for DocuSign.
