Shares of DocuSign (NASDAQ: DOCU) are down close to 25% in pre-market trading on Friday following the company’s less-than-impressive quarterly results. DocuSign reported revenue of $588.7 million in fiscal Q1 of 2023 (ended in April) and adjusted earnings of $0.38 per share.
Comparatively, analysts had projected the company to report revenue of $581.76 million and adjusted earnings of $0.46 per share.
While DocuSign increased revenue by 25% year-over-year in Q1, its earnings per share narrowed by more than 10%. This significant earnings miss dragged DOCU stock lower, and it’s now trading 79% below all-time highs.
So, why did lower earnings per share result in a sell-off in DocuSign shares? Let’s see what earnings per share is and why it is a closely watched metric by investors and analysts.
What is earnings per share?
EPS or earnings per share is among the most common metrics used to analyze a company’s performance. It indicates profitability on a per-share basis, which can be used to pay investors a dividend, lower the debt balance, or reinvest in growth opportunities.
The net income or profits is calculated by subtracting a company’s expenses (cash and non-cash) from its revenue. It includes the cost of goods sold, operating expenses, as well as depreciation, and interests. A company’s earnings will vary over time if it raises additional equity capital, repurchases shares, issues bonus shares, or undertakes a stock split.
Similar to several other metrics, the EPS should not be viewed in isolation. Some of the most common ratios that include the EPS are the price-to-earnings ratio and the return on equity ratio.
What is adjusted EPS?
Companies adjust profit margins for non-recurring expenses or incomes that include share-based compensation, the sale of non-core assets, or loss due to natural disasters such as floods or earthquakes.
DocuSign, in fact, reported a net loss of $27.37 million or $0.14 per share in Q1. However, its stock-based compensation stood at $110.7 million, allowing it to report an adjusted profit.
There is also a metric called diluted EPS, which includes all potential outstanding shares of a company. The diluted EPS includes stock options and convertible debt, which will increase the share count and reduce the metrics to a certain extent. For example, DocuSign’s EPS of $0.38 is diluted while its basic earnings stood at $0.39 in Q1.
Writer at MyWallSt
Aditya took an interest in the stock market during the financial crash of 2008-09. His favorite stocks include Roku and Apple as both companies enjoy a leadership position in their respective verticals and are poised to beat the broader markets consistently going forward.