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Shares of cloud contract company DocuSign (NASDAQ:DOCU) have soared amid the novel coronavirus pandemic, on the idea that with most companies employing work-from-home strategies, DocuSigns virtualized cloud contract solutions are increasingly turning into a must-have enterprise solution.

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Consequently, under the impression that DocuSign demand has burgeoned over the past month, investors have pushed DOCU stock up 30% to fresh all-time highs.

Is DOCU stock a buy on this red-hot rally?

Most signs point to yes. But one big (and arguably the most important) sign points to no. Simply consider the five following points:

Multiple data-points (and common sense) suggest that DocuSign is seeing a solid uptick in deal flow during the coronavirus pandemic.

Online search interest related to DocuSign has soared to 52-week highs over the past month. Web traffic on DocuSign.com has picked up. App download volume for DocuSign has similarly moved higher. Channel checks show strength, too, with the analyst team over at Wedbush recently saying in a note to clients:

Based on our recent checks in the field we continue to believe DOCUs deal flow is holding up well/stronger than expected in this COVID 19 pandemic environment as the solution set and e-signature platform is being prioritized by IT decision makers as it serves a clear key need for remote workers at home during this lockdown.

Its clear that DocuSign is set to report strong first- and second-quarter numbers on the back of improving demand trends. Those strong numbers will stand in stark contract to disastrous numbers reported pretty much everywhere else in corporate America. This stark contrast could help support recent strength in DOCU stock.

One of DocuSigns biggest growth opportunities is what management calls its land-and-expand model, or the ability to on-board an enterprise customer for its e-signature solution, and then cross-sell other cloud contract solutions to that customer.

It appears this land-and-expand model is taking hold. According to the analyst team at Wedbush:

With the DocuSignAgreement Cloud as well as its CLM offering (SpringCM acquisition) providing many additional use cases beyond just signing a contract,DocuSign is continuing to expand throughout the entire deal process which is a major differentiator in this environment.

Broadly, then, it increasingly appears that DocuSign is accelerating on its transformation towards becoming an all-in-one, end-to-end cloud contract solutions platform. This attractively differentiates the company from other e-signature platforms, and will enable DocuSign to sign not just more customers, but also substantially increase average contract value size.

The bump in demand for DocuSigns cloud contract solutions is more than just a near-term, Covid-19 driven phenomenon. Instead, its part of a much broader, much bigger virtualization megatrend, which will sweep across corporate America with increasing velocity over the next decade.

Long story short, thanks to technological advancements and cloud-hosting capabilities, enterprise workflows and processes are being virtualized. These virtualized processes are often more convenient, faster, cheaper and require less maintenance. In other words, they are often better than their physical counterparts.

The shift from physical to virtualized processes already started in the 2010s. In the 2020s, however, the shift will gain momentum, partly because of the coronavirus pandemic reminding everyone that the physical world can be shut down at any moment, and partly because the adoption curve for virtualized tech will cross the chasm.

As the virtualization megatrend gains steam, DocuSign will significantly expand its customer base and grow revenues at a steady 20%-plus pace.

Steady 20%-plus revenue growth at DocuSign should lead to steady 20%-plus profit growth because of DocuSigns favorable gross margin profile.

That is, DocuSign is a subscription-based business. As a subscription-based business, DocuSigns cost of goods sold is very small. Gross margins are consequently up near 80%.

Thats high high enough that it means this company should have big net profit margins at scale. Big margins plus big revenues equals big profits.

Despite all the aforementioned positives, I remain hesitant to chase the DOCU stock rally for one big reason: valuation.

DocuSign is set to earn about 50 cents per share this year. DOCU stock is up at $100. Thus, shares are trading at 200-times forward earnings.

But, that isnt what scares me about the valuation. DocuSign is a growth stock. Growth stocks have huge valuations. So a 200-times forward earnings multiple doesnt scare me.

Instead, what does scare me is the lack of long-term upside potential here. My modeling suggests that, even under aggressive growth assumptions, this company will still only do about $5 in earnings per share in 2030. Even if you assume a 35-times forward earnings multiple which is an aggressive exit multiple that still only gets you to a 2029 price target for DOCU stock of $175, or roughly 6.5% return per year over the next decade.

The stock market returns, on average, 7.5% per year. Thus, DOCU stocks valuation seems overextended at the current moment.

DocuSign is a great company, with a ton of long-term revenue and profit growth potential. However, coronavirus hype has thrust DOCU stock into overvalued territory. As such, I wouldnt chase the rally. Instead, Id wait for the coronavirus hype to die down. Id wait for the stock to retreat. And then Id buy the dip, once the numbers start to make sense again.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the worlds top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm.As of this writing, he did not hold a position in any of the aforementioned securities.

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Valuation Risks Keep DocuSign Stock From Being a Buy - Investorplace.com