"New Tech" / WFH Companies: Week 6 (DOCU & CRWD)
This is the sixth and final instalment of my look at some “new tech / WFH” companies, consisting of two companies that will be reporting earnings this week and next. DocuSign (DOCU) will report earnings on March 11th, and CrowdStrike Holdings (CRWD) will report earnings on March 16th.
As a reminder, the 22 companies that have announced or will be announcing their most recent quarterly results, and about which I have written, are listed in the table to the right.
Both DocuSign and CrowdStrike have been pandemic beneficiaries, but the gains the pandemic has bestowed on these companies are by no means fleeting. Although I consider both companies to be pandemic beneficiaries, I do not believe that they are necessarily WFH stocks that are at risk of revenues slowing as the pandemic fades. Both companies are still losing money on the bottom line on a GAAP basis but are profitable on a non-GAAP basis (mainly due to backing out non-cash compensation). Valuing these companies using traditional valuation metrics is impossible in most cases, so you need to first get your head around what really makes these companies tick. Valuations aside, you might find one or both of these companies attractive should the recent market turmoil continue and a further market pullback occurs, or if one of these companies stumbles (for understandable, short-term reasons) on this round of earnings releases. Both stocks are well off their 52-week highs, but DOCU doubled in price in 2020 and CRWD tripled, so there are good embedded gains. Having said this, both stocks also remain vulnerable to further downside price movement should overall risk sentiment continue to sour around richly-valued technology stocks. Personally, I like both companies and find their long-term businesses very attractive, but as I have learned recently, patience is a virtue and you need to pick your entry points carefully in a choppy market. Should you invest at these levels, remember that their high valuations mean that – should markets continue to be unsettled – you could be in for a rough ride in the short term, so you need to have long-term conviction to get involved.
Last week, I discussed four other companies: Zoom Communications (ZM), Lemonade (LMND), Sea Limited (SE) and Snowflake (SNOW). I provided an update on the results of last week’s high flyers which you can find in the comments section of the blog post here (scroll all the way to bottom). As you might have expected, all four company stocks were hammered last week as selling pressure on technology stocks gained momentum as the week wore on. Hopefully, Friday’s gains were the beginning of the end of this short correction period rather than an ongoing move down even more as the high flyers come to earth based on their nose-bleed valuations.
At the end of this article following the discussion, I have included two tables which have information about each company’s financial results and share performance. Analysts’ consensus sales and earnings for 4Q are included towards the bottom of the second table so that you can track how the companies’ actual results compare to analysts’ expectations. The table also includes FY2022 (ended Jan 31, 2022, so this year) projected earnings and revenues for each company. These are critical when listening to and evaluating forward guidance, because they form the foundation of the lofty valuations of these companies.
To provide a preview of these two company stocks before getting into my more descriptive views of the companies, the table below contains summary data for the high flyers being discussed this week.
DocuSign (Nasdaq, DOCU; investor website here):
DocuSign was founded in 2003, started commercial operations in 2005 and went public in 2018. The company started by doing just what it does today as far as its core business – electronic signatures – to simplify the legal closing of (initially) commercial real estate transactions. Since then, the company has expanded organically and through acquisition to become the leading provider of secure electronic signature technology and digital transaction management services in the world, thereby eliminating the need to send paper documents. In addition to making the execution of documents vastly easier, their service has also saved the world a huge amount of paper and related products used to produce paper. The company has retained its first-mover advantage and is a true disrupter, operating today (according to their website) in over 180 countries. As far as revenue generation, the initiator of documents pays DocuSign, not the person signing the contract. Subscription-based services account for 95% of DOCU’s total revenues, and the company had around 822,000 customers at the end of its third quarter 2021, according to a presentation on the company’s website that you can find here. According to website Datanyze, DOCU has a market share of 73.6%. There are competitors, but not that many, perhaps the most formidable of which are SignNow (5.4% market share) and Adobe Sign (4.9% market share). The company operates at a bottom-line loss due primarily to non-cash compensation, not dis-similar to many of its peers in the high flyer category. However, the company generates positive cash flow from operations. Based on its expected top line growth, DOCU will likely become (GAAP) bottom-line profitable very soon. DOCU had nearly $600 million of available cash and liquid investments on its balance sheet at the end of its third quarter, and aside from some long-term operating leases, has a convertible bond which were recently (Jan 2021) refinanced. Subsequent to the end of the company’s third quarter, DOCU sold $690 million 0% convertible bonds due 2024 (upsized, convertible at $420/sh, s/t capped call to reduce dilution, which I am not sure I fully understand). Most of the proceeds of the new bond were used to refinance the existing convertible bond. DocuSign was a pandemic beneficiary – the increased use of virtual / electronic signatures and transaction closings undoubtedly increased as the pandemic discouraged face-to-face transaction closings, although the general slowdown in business in the early stages of the pandemic hindered growth. Top-line growth was robust in both 2Q21 and 3Q21, so the company quickly recovered from this period with even stronger growth and an acceleration of the macro-trend of virtual transaction closings. I don’t recall seeing DOCU on the Motley Fool top 10 list, although the stock service does write around DocuSign frequently and seems to be bullish. StarMine (Refinitiv, consensus analysts’ rankings) has the company ranked 3.3, or neutral. I suspect both MF and StarMine analysts have no issue per se with the company but are balking at the valuation given that the company is not yet bottom-line (GAAP) profitable and trades at 21 times forward revenues. At Friday’s close, DOCU is 30% off its 52-week high, which might entice buying interest.
CrowdStrike (Nasdaq, CRWD; investor website here):
CrowdStrike is a cloud cybersecurity company that was started in 2011 and listed in 2019. It has become increasingly well-known as cyberattacks on commercial and government installations have increased, with its work on the cyberattacks on the DNC in 2016 perhaps very memorable to many. “CrowdStrike's main cloud-based platform, Falcon, bundles together various endpoint security, threat detection, and cyber-attack response services for large organizations. It serves many of the world's largest banks, healthcare providers and energy companies” (from Motley Fool). It is different from older and more traditional cybersecurity companies because its services are cloud-based rather than resident on local computers. The company got a boost in its business from the pandemic as the WFH trend set in, requiring companies with remote workers to enhance their cybersecurity protection. CrowdStrike does have competitors, some large, including the likes of McAfee, Microsoft and Cisco, amongst others. I could not find market share data for cloud-based cybersecurity companies but would guess that CRWD has a strong market position and certainly glowing customer reviews. As threats over malware and data theft grow, the demand for CrowdStrike’s offering will also inevitably grow. CRWD is currently on the Motley Fool Top 10 list, where it has appeared since at least June 4, 2020 (price then $95.98, now $183.12). StarMine average consensus analysts’ ranking is 3.9, or neutral. The company is 27% off its 52-week high, but still trades at 33 times next year’s revenues, a very toppy multiple that makes the stock expensive even with the recent pullback. The short interest % float is also a bit on the high side at 4.6% (from Feb 11th), signalling that perhaps more-than-average number of investors view the stock as relatively expensive.
Summary of companies presented this week: The first table below contains operating results for the two companies I am writing about that will release earnings this week (DOCU) and next (CRWD). These include LFQ through October 31st2020 (3Q2021) for both companies. The second table contains mainly stock data for these companies. Consensus earnings and revenue expectations for announcements this week are at the bottom of the second table.
DISCLAIMER: These are my opinions on two stocks that are reporting earnings the next two weeks: CRWD and DOCU. I am not a research analyst or a registered investment advisor, and the information in this article is not a recommendation to buy or sell shares. It is just my two cents. I do not currently own shares of either of these companies.
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