DocuSign Stock: Weak Guidance Tanks DOCU Shares, Time to Buy?
One of the most beloved pandemic plays, DocuSign stock dropped 42% after last week’s earnings. The general Wall Street consensus suggests slowing growth may be a cause of concern. But, does this present a buying opportunity for the once-prized pandemic stock?
DocuSign (Nasdaq: DOCU) is an E Signature solutions company that makes it easy for businesses to prepare and sign digital documents. During lockdowns, DocuSign stock was a top growth stock to own.
However, the past few months have been a different story. In particular, the earnings selloff cratered share prices. Since the big drop, DOCU stock has bounced back slightly after SEC filings show CEO Dan Springer bought around $5 million worth of stock after the fall.
The buying is helping soothe investor fears as share prices are stabilizing for now. But does this mean it’s time to buy the beaten-down stock? Or, will it have further to fall? Let’s take a look.
Why DocuSign Stock Is Down
DocuSign’s third-quarter earnings wasn’t a terrible report by any means. In fact, it shows a lot of positives, such as continued top-line momentum and improving margins. Even more, the company is expanding its partnership with the leading CRM platform Salesforce (NYSE: CRM).
That said, the reaction is more the result of what the company expects going forward. DocuSign is still expecting revenue growth, but not at the rate it’s been seeing since the pandemic.
The weaker guidance stems from COVID-19 fears fading and competition creeping into the industry. With this in mind, before DocuSign’s earnings, it was still richly valued with a forward P/E of +126 in Q2. Compared to the stock’s forward p/e now, which is currently around half (61) of what it was, you would assume the company is discounted.
Yet, with slowing growth, this is expected. And on top of this, DocuSign stock is still non-profitable, with a net loss of $5.68 million, compared to a loss of $58.49 million last year at this time.
All in all, we are seeing investors transitioning from pandemic plays to safer assets such as blue-chip stocks. Seeing as inflation has risen 6.8% over the past year, and asset prices are running hot, investors are expecting a rate hike sooner rather than later.
And when this happens, it’s generally non-profitable growth stocks that get the hardest, such as the case in DocuSign. At the same time, DOCU stock isn’t the only pandemic-fueled investment that’s falling. Zoom Video (Nasdaq: ZM) is another pandemic fueled rally stock that’s falling, down over 50% this year.
Can the Stock Bounce Back?
Seeing that DocuSign stock saw its most significant decline in share price ever last week, investors are hoping share prices bounce back quickly. Although the company is at a lower value, it’s still not cheap.
For example, one of DocuSign’s biggest competitors, Adobe (Nasdaq: ADBE), is currently trading at a forward P/E of 43.67, still lower than DOCU. Not only that, but Adobe is highly profitable with $1.2 billion in net income in its latest earnings.
Of course, this doesn’t mean that DocuSign shares won’t bounce back. And on top of this, P/E only looks at a few aspects of the company. But, considering earnings expectations are starting to slow, it will continue putting pressure on the stock.
Another thing to consider is how the market dynamics are shifting. In the past few months, quality stocks like Apple (Nasdaq: AAPL) and Microsoft (Nasdaq: MSFT) are seeing buying, while growth is selling off.
On the other hand, the CEO’s confidence in the company shows with his massive buying spree following the earnings selloff. And DocuSign is still the No. 1 e signature solutions company with a global footprint.
Most importantly, DocuSign’s clients include big brands such as:
- Apple
- Verizon
- Netflix
What’s more, the company’s top clients are sticking with them as net dollar retention hit 121% in Q3.
Overall, I think DocuSign is at a critical moment in the company’s history. After riding the digital wave these past two years, we’ll see how DocuSign stock can navigate a different environment.
Why You Should Avoid DocuSign Stock
Several things are working against DocuSign stock right now. Despite continued top-line growth, the company still isn’t turning a profit.
With this in mind, here are a few reasons to avoid buying the stock.
- Growth Slowing – DOCU’s explosive run resulted from its incredible growth. With growth now slowing, share prices are feeling the pressure. Not only that, but its rich value is also the result of higher growth expectations.
- Pandemic Plays Fading – The narrative that pushed stocks like DocuSign and Zoom to new heights is now fading. As the economy reopens and people are getting back to the office, there’s less focus on digital.
- Competition – Another key point to consider is competition creeping in. Seeing as DocuSign’s primary service is replicable, the company finds itself in a vulnerable position. Even more, big brands like Adobe are gaining market share with similar services.
All in all, DocuSign finds itself in a critical position. Looking ahead its vital the company continues attracting new clients while holding onto existing accounts.
Are There Any Reasons to Buy DocuSign Stock Right Now?
Looking at DocuSign’s stock chart, you would think something detrimental happened in its latest earnings. But the reaction results from what to expect from the company in the future.
Additionally, non-profitable stocks with high values are getting crushed this year. High growth funds like ARKK Innovations ETF are also down over 16% in the past six months. So, even with the weaker guidance, DocuSign stock looked ready to break down.
With this in mind, DOCU is bouncing back slightly, up almost 10% from its lows. But investors shouldn’t get too excited yet. Growth stocks are likely to stay under pressure, with the FED suggesting rate hikes next year.
About Pete Johnson
Pete Johnson is an experienced financial writer and content creator who specializes in equity research and derivatives. He has over ten years of personal investing experience. Digging through 10-K forms and finding hidden gems is his favorite pastime. When Pete isn’t researching stocks or writing, you can find him enjoying the outdoors or working up a sweat exercising.