It’s been an impressive stretch for the Nasdaq-100 (QQQ), with the index up more than 6% for the month of June, pushing the index to a 12% return year-to-date, after already lapping an incredible 47% return last year. While the index is not yet overbought, as shown below, we continue to have high levels of complacency, and the Nasdaq Composite is now nearing overbought levels. This doesn’t mean that the market can’t go higher from here, but it does suggest elevated risk for starting new positions, with the best course of action being to wait for a dip to add exposure to the market. For investors patient to wait for a dip, two names look to be solid buy-the-dip candidates if we do see some weakness this summer. Both names sport double-digit compound annual EPS growth rates and are leaders in their industry with high double-digit sales growth, making them ideal candidates to put at the top of one’s shopping list.

(Source: TC2000.com)

DocuSign (DOCU) and Atlassian (TEAM) have underperformed the Nasdaq Composite over the past six months, with the Software Sector lagging the Nasdaq Composite after an impressive rally off the March 2020 lows. While this underperformance has been a little disappointing, it’s to be expected, as even the best growth stocks need time to build new bases after a triple-digit performance in less than a year. The good news is that these multi-month consolidations have allowed DOCU and TEAM to grow into their valuations a little, with TEAM now trading at 131x FY2023 annual EPS estimates and DOCU trading at 102x FY2024 annual EPS estimates. These are not cheap valuations by any means, which trades at a deep discount to peers currently. However, for high growth stories with 75% plus margins like this, I would expect further weakness to improve valuations should present a buying opportunity, given how strong these names acted during the recent correction.

Beginning with TEAM, the company has an incredible track record of earnings growth and is one of Gartner’s Magic Quadrant leaders for Enterprise Agile Planning Tools. Since FY2015, the company has posted a compound annual EPS growth rate of 32.7%, making it one of the fastest-growing tech names in the market. In the same period, the company grew gross margins from 83% to 84%, with revenue growing by an average of 37% year-over-year. Despite lapping incredible growth rates, the company reported another quarter of 38% growth just recently, with gross margins hitting a new 1-year high of 84.1%. This translated to TEAM’s strongest quarter of growth in the past two years, and the earnings trend is expected to remain robust, with very bullish estimates ahead in FY2023.

(Source: YCharts.com, Author’s Chart)

As noted previously, TEAM’s annual compound annual EPS growth rate came in at 32.7% between FY2015 and FY2020, and it’s expected to maintain a 25% compound annual EPS growth rate looking out to FY2023 ($1.96 vs. $0.28). This would make TEAM one of less than 250 large-cap companies with a 25%+ compound annual EPS growth rate, with the stock commanding a triple-digit multiple for this impressive growth rate and industry-leading margin profile. From a revenue multiple standpoint, it’s generally been best to buy the stock at below 25x sales and take profits above 36x sales, where the stock tends to have muted upside. Based on a current market cap of $64BB and $2.36BB in FY2022 revenue, the stock is not cheap, sitting at 27x sales. However, if we could see the stock fall back towards support near $228.00 per share, this would improve the revenue multiple to 23x sales, where the valuation would become more compelling. So, if we do see a correction for these tech names, this would present a low-risk buying opportunity.

(Source: TC2000.com)

If we look at the above chart, a pullback below $228.00 would line up with TEAM’s long-term channel support coming in near $210.00. So, while I am bullish on the stock long-term, I would view dips below $228.00 as ideal low-risk buying opportunities. This would morph the current cup & handle pattern and shake out many breakout traders while presenting a lower-risk setup for investors from a valuation standpoint.

The second name that looks intriguing if we see a healthy correction is DocuSign, one of last year’s tech leaders that had its IPO debut in early 2018. The stock was up 199% in 2020 as businesses rushed onto the platform to continue business as usual in a world where social distancing had become the norm. However, after a 199% return, the stock got a little ahead of itself, leading to recent underperformance. The good news is that the stock looks to be gaining relative strength recently, posting a new weekly all-time closing high after an incredible fiscal Q1 2022 report.

During the quarter, revenue soared to $469MM, up 58% year-over-year, with subscription revenue up an impressive 61% year-over-year to $452MM. Most impressive was sequential customer growth, with more than 90,000 customers added in the most recent quarter, even as COVID-19 headwinds have cooled off with higher vaccination rates. This suggests that DocuSign is here to stay, with the sticky time-saving service likely to be a core platform for businesses globally.

(Source: YCharts.com, Author’s Chart)

Like Zoom, which has become a household name, DocuSign is a massive leader in its field with significant brand recognition relative to other offerings. This has allowed the company to maintain a healthy market share despite other offerings out there like SignNow, HelloSign, RightSignature, and Adobe Sign, which is part o the Adobe Document Cloud. As we can see from the earnings trend above, growth is expected to remain robust going forward, despite lapping a year with 290% growth ($0.90 vs. $0.31). In fact, if we look ahead to FY2023 estimates, annual EPS is expected to increase by another 156%, making DOCU one of the highest growth names in the tech space currently.

(Source: TC2000.com)

Some investors might argue that 100x earnings is a rich valuation for DOCU compared to its FY2024 earnings estimates. While it certainly isn’t cheap, the company’s long-term potential seems much larger, with FY2025 annual EPS estimates sitting closer to $6.00 and the company having an industry-leading net-dollar retention rate that only a few other companies can compete with (125%). This suggests that a multiple of 100 is not unreasonable and also suggests that annual EPS estimates might be on the conservative side. If we use a fair earnings multiple of 100x and $3.25 in annual EPS estimates for FY2024, this would place DOCU’s fair value at $325.00, translating to 20% upside from current levels. In order to bake in a margin of safety of 30% relative to fair value, the goal would be to buy DOCU at $230.00 or lower, which would leave the stock at 85x what I believe are conservative FY2024 annual EPS estimates. Therefore, while I am bullish on DOCU’s fundamental story here long-term, I believe it’s a better buy-the-dip candidate vs. paying $279.00 at current levels.

In a market where it’s tough to find value in tech except NFLX, DOCU and TEAM look like two solid names worthy of purchases if we do see a market-wide correction. However, while I think both are exceptional growth opportunities, I would prefer to buy on dips to $230.00 on DOCU and $228.00 on TEAM, which would bake in a margin of safety into their share prices and allow them to head towards oversold levels. For now, I see the best opportunity in tech as NFLX, and I would not rush to be a buyer unless we see a moderate correction.

Disclosure: I am long NFLX

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.

DOCU shares were trading at $278.26 per share on Thursday afternoon, down $1.31 (-0.47%). Year-to-date, DOCU has gained 25.17%, versus a 15.86% 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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