It’s been a volatile start to the year for the financial markets, but the Nasdaq Composite (QQQ) has helped to pull the major averages out from under the rubble, with some stocks providing clues that they might be the new market leaders. While the large-cap leaders are quite obvious, with Amazon (AMZN) and Netflix (NFLX) blasting to new highs in Q1, the small and mid-cap tech stocks have gone under the radar a little, though are beginning to get more coverage recently. Based on early technical strength from Everbridge (EVBG) and Docusign (DOCU), these two names look like they could be new market leaders, and should have a lot more gas in the tank long-term if this the case.

(Source: TC2000.com)

The key to finding the new market leaders after a significant downdraft is typically looking for high-growth, both in earnings power and in revenues. When it comes to Docusign and Everbridge, the former saw massive earnings growth in FY-2020, and a 40% revenue growth rate with stable margins suggests that there’s more earnings growth to come. Meanwhile, while Everbridge does not have positive earnings yet, the company continues to see robust revenue growth, with revenue growth rates accelerating in the most recent quarter by 200 basis points to 37%. Both of these names have shown exceptional technical strength in the face of near-unprecedented selling pressure in the markets, suggesting that they are likely to be new market leaders. Let’s take a look at each of them in a little more detail below:

(Source: Company Website)

Beginning with Docusign, the impressive relative strength should be evident, as the stock did not even re-enter its primary IPO base during the mid-March market crash, and blasted to new all-time highs in April with ease. This is extreme and unusual strength given that the Nasdaq Composite remains more than 10% off of its old highs, and it suggests that Docusign does not need the market to participate for it to head higher. The fact that the stock is performing so well during this COVID-19 pandemic should not be a surprise as while human contact outside of close family has come to a near halt; business has not. Fortunately, Docusign answers this problem with its E-signature products, which allow for deals to be completed digitally vs. face to face. Let’s take a look at the company’s growth metrics below:

(Source: TC2000.com)

As we can see from the below chart of Docusign’s annual earnings per share [EPS], the company finally swung to profitability in FY-2019 and enjoyed over 240% growth in earnings in FY-2020. This is incredible growth for any company, let alone a mid-cap tech company, and FY-2021 estimates are expecting this trend to continue, with FY-2020 annual EPS forecasts of $0.54. Assuming the company hits these estimates, this would translate to 74% growth year-over-year, on the back of an explosive triple-digit growth rate that the company is lapping. Therefore, while DOCU might look expensive at over 300x FY-2019 earnings, it looks much cheaper if we factor in the possibility that it could be earning nearly $1.00 per share by FY-2022. Typically, the best growth stocks look far too expensive early on, but they’re expensive for a reason. When it comes to high double-digit and triple-digit earnings growth rates with game-changing products that change how we do day-to-day activities, the key is finding an ideal entry, not worrying about high P/E ratios. Based on these growth rates, I would not be surprised to see DOCU hit $140.00 per share in the next 12 months.

(Source: YCharts.com, Author’s Chart)

Moving over to Everbridge, the company is more obscure at just below a $5 billion market cap, with products that focus on better operational efficiency and response across several industries. Similar to Docusign, the stock showed extreme strength during the Q1 market sell-off, as it did not even re-enter its prior weekly base, but instead begun to build a new base at all-time highs. Year-to-date, the stock is up an incredible 45% vs. the Nasdaq’s negative return, suggesting that funds are piling into the stock and are quick to support it on dips.

(Source: TC2000.com)

Moving to the company’s growth metrics, we can see that we do not have earnings on the table in Everbridge’s case. However, the company is expected to swing to profitability earlier than expected in FY-2022, with FY-2022 EPS estimates sitting at $0.06. While it may seem insane to pay more than 1000x earnings for EVBG, the differentiator for the stock is stable revenue growth above 40% for the past two years and exceptional margins of near 70%. If we look at the company from a price to sales standpoint, the company is expected to do over $270 million in revenue in FY-2020, putting the company at a forward sales multiple of 14. This is a very reasonable metric for a company growing at 40% revenues per year in an environment that should provide a tailwind to Everbridge’s sales growth and net retention rates. Therefore, while Everbridge may not have earnings, it has revenue growth at a reasonable price, and acceleration in revenue growth rates would not be surprising.

(Source: YCharts.com, Author’s Chart)

While both EVBG and DOCU have had very nice runs thus far this year and are not near buy-points, I believe both companies are excellent candidates for watchlists to look at buying on dips. Ideally, pullbacks to the 50-day moving average would provide better entry points, or new bases to allow the stocks to cool off. Given each company’s strong revenue growth and a stronger desire for its products following the COVID-19 breakout, I believe both names should do well and become more sticky with organizations that may not have tried these products and services previously. Therefore, I believe that sharp pullbacks of 15% or more in these names would provide buying opportunities, and I remain long. Ultimately, I would not be surprised to see DOCU head over $140.00 in the next 12 months, and would not be surprised to see EVBG head over the $130.00 level.

(Disclosure: I am long DOCU, EVBG)

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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DOCU shares were trading at $110.43 per share on Tuesday afternoon, up $3.35 (+3.13%). Year-to-date, DOCU has gained 49.01%, versus a -9.95% rise in the benchmark S&P 500 index during the same period.

About the Author: Taylor Dart

Taylor has over a decade of investing experience, with a special focus on the precious metals sector. In addition to working with ETFDailyNews, he is a prominent writer on Seeking Alpha. Learn more about Taylor’s background, along with links to his most recent articles. More...

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