Shares of DocuSign (NASDAQ: DOCU) fell by 42% on Friday to $135.09 per share, valuing the company at a market cap of $26.6 billion. DOCU stock is now trading 56% below its all-time highs.
What impacted DocuSign last week?
In the fiscal third quarter of 2022 that ended in October, DocuSign reported revenue of $545.5 million, an increase of 42% year over year. Its subscription sales rose 44% to $528.6 million while adjusted earnings more than doubled to $0.58 per share. Comparatively, Wall Street forecast Q3 sales of $530.67 million and earnings of $0.46 per share. So why did DOCU stock crash despite beating consensus estimates for Q3?
Investors and analysts were worried about the company’s decelerating growth after economies all over the world are reopening resulting in slower than expected demand for DocuSign’s suite of solutions.
DocuSign’s billings at the end of Q3 rose 28% to $565.2 million, which was significantly lower than the 47% growth experienced in Q2. The billings are basically the amount of sales that have been booked but not recognized as revenue.
In fiscal Q4 of 2022, DocuSign forecast sales between $557 million and $563 million, below estimates of $574 million. DocuSign estimated billings of $653 million in fiscal Q4 which again fell short of Wall Street forecasts of $705.4 million.
DocuSign’s CEO Dan Springer said the weak demand was disappointing after a pandemic-fueled year allowed the company to record exceptionally high growth rates at scale. In fact, DocuSign experienced six quarters of accelerated growth after which customers returned to normalized buying patterns.
Wall Street downgrades DOCU stock
Shortly after DocuSign’s less than impressive Q3 results, several analysts on Wall Street downgraded the stock.
According to multiple reports from TheFly:
- JPMorgan (NYSE: JPM) downgraded DocuSign stock to “underweight” from “neutral” with a price target of $175
- UBS downgraded DocuSign stock to “neutral” from “buy” and lowered its price target to $170 from $350
- Piper Sandler downgraded DocuSign stock to “neutral” from “overweight” and lowered its price target to $200 from $330
- Citi (NYSE: C) maintained a buy rating on DocuSign stock but lowered its price target to $231 from $389
Several other investment banks including Wells Fargo (NYSE: WFC), Wedbush, and RBC Capital (NYSE: RY) also lowered 12-month price targets for DocuSign stock.
Let’s see if the ongoing pullback provides long-term investors an opportunity to buy the dip or will it continue to move lower in the upcoming trading sessions.
The bull case for DocuSign
DocuSign has estimated its total addressable market at $50 billion providing it with enough opportunities to grow top-line at a rapid rate. It is well poised to keep gaining traction in a world that’s increasingly shifting towards a digitally-powered economy. DocuSign has already increased sales from $518 million in fiscal 2018 to $1.45 billion in fiscal 2021. In the last 12-month period, its sales have stood at $1.79 billion.
DocuSign will now have to transition from demand fulfillment to demand generation which means revenue is all set to decelerate in the next few quarters. In case, the company reports sales of $2.09 billion in fiscal 2022, its three-year growth rate stands at 42%. Further, its earnings are also forecast to expand at an annual rate of 166% from $0.09 in fiscal 2019 to $1.70 in fiscal 2022.
DocuSign stock is now valued at a forward price to sales multiple of over 12x which is still steep. It remains vulnerable in a broader market sell-off but is also one of the market leaders in its vertical.
DocuSign stands to benefit from multiple secular tailwinds going forward and the stock should remain on your buying radar in the future.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
