What’s Going On With DocuSign?
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From the ashes of The Corona Crash rose one of the fastest bull markets ever recorded. It encapsulated the greatest 50-day rally in the history of the S&P 500, thanks in no small part to a cadre of businesses that seemed custom-made for the extraordinary conditions in which the world had found itself. Global lockdowns and remote work meant that the likes of Zoom, Peloton, et al flourished. There is an argument that few benefitted more from the changes thrust upon the working world than DocuSign.
2021, however, played out very differently for this small subset of the market. Facing tough comparables, the reopening of the economy, and the perception by many to have benefited from a pull-forward in growth that will ultimately be unsustainable in a post-pandemic world, investors turned their back on much of 2020’s darlings. For most of the year, DocuSign was one of the few to buck this trend as it continued to deliver the levels of growth needed to survive in this market. That was until last week when, at the first sign of a slowdown, the stock sold off to the tune of 42% in one day. A devastating blow that undid much of the stock’s gains over the course of the pandemic.
Let’s take a look at the earnings report that caused all the damage. At first glance, it’s tough to decipher what all the fuss was about. Revenue grew at 42% to $545 million with adjusted earnings of $0.58 a share, comfortably outpacing consensus estimates of $0.46 a share on revenue of $531 million. A slight deceleration compared to previous quarters but certainly not worthy of such a dip. As always though, the stock market cares a lot more about what you’re going to do than what you’ve just done, and DocuSign’s revenue guidance for Q4 of $557 to $563 million — which would represent ~30% growth — fell below analysts’ expectations of $575 million.
When we consider the quality of DocuSign’s recent earnings reports and the valuation the market had given it, it’s safe to assume that only meeting expectations won’t cut the mustard. Missing them completely seems out of the question. Looking at the company’s billings growth over the last few years gives us a clear look at the bigger picture:
A 28% growth rate puts the company below pre-pandemic levels. This coalesces with CEO Dan Springer’s comments: "After six quarters of accelerated growth, we saw customers return to normalized buying patterns". What is interesting about this is that while customers returned to their old ways, DocuSign and its sales team have yet to do so, suggesting an air of complacency may have taken hold at the company and exacerbated the current dip. “We got to a place over the past year, year and a half, where we were fulfilling demand. And what we've always done in the past is generate demand”, Springer would go on to say that he has taken personal responsibility for remedying this and getting the company “back on track”. Putting his money where his mouth is, he has even committed to buying $5 million worth of shares, something we love to see.
We’ve talked at length about the pull forward in growth caused by the pandemic for much of MyWallSt’s shortlist. The outsized numbers seen across the “stay-at-home stocks” were never going to be sustainable long-term and a deceleration of this nature for DocuSign seemed inevitable. Springer actually said he was surprised it was able to maintain outsized growth for so long. It finally happened during a severe sell-off in high-growth names certainly helped compound matters, and led to an almost $18 billion haircut for DocuSign which is sure to be reflected on as a pretty steep overreaction.
So how does this affect our investment thesis for DocuSign? Has anything materially changed in terms of how the business operates or its future prospects? Is it still the same company it was last Wednesday?
Bar lighting a fire under its sales team, I would say this slowdown will have little long-term impact. It had showcased its business need long before the word coronavirus reverberated around the world — it was added to the MyWallSt Shortlist in July 2018! — and while it obviously benefitted from pandemic tailwinds, these are not what make it a great business. The company remains a high-margin, scalable disruptor with a vast market opportunity and great leadership who are more than capable of steadying the ship. Yes, there are some holes to plug but I’m confident that this company is more than capable of doing so and will be a winner for years to come.