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Why Is DocuSign Stock Down After Its Q3 Earnings?

Shares of DocuSign fell more than 30% in after-hours trading after its underwhelming Q4 guidance — is the growth stock era done for?

DocuSign (NASDAQ: DOCU) took a mighty hit following its Q3 results. The software as a service (SaaS) company fell 30% after-hours on the news, prompting concerns in future growth following the boom for its services during the pandemic. 

What does DocuSign do?

DocuSign is the world’s number one e-signature solution business that allows customers to prepare, sign, and store agreements, digitally. It works with companies like Salesforce to make contract management seamless and easy for its customers across industries including finance, real estate, banking, and healthcare among others.

DocuSign’s Q3 results

DocuSign reported revenue of $545 million in Q3, up 42% from the year before, and subscription revenue was up 44% year-over-year (YoY). Gross margins grew to 79% in the quarter from 74% in the year prior.

So the real reason the stock is down? Weaker guidance for the fourth quarter! Analysts were expecting revenue of $574 million in Q4, but DocuSign estimated $563 million — and that’s on the high side of its forecast. 

Should DocuSign investors be concerned?

DocuSign is now at a 52-week low, more than 40% below its high of $308. When a stock experiences a drastic fall like this, you have to ask yourself; has this really affected the long-term thesis of the company? Is this a permanent ongoing issue or can this storm be weathered?

However, many stocks have moved into correction territory in recent months, and growth is certainly taking the hardest hit.

The irregular stock market movements are spiking further concerns in relation to an overly frothy market, given the rally many growth stocks have had in 2020 and 2021. But, a 30% decline based on slightly weaker guidance makes DocuSign look like an attractive investment at these levels.

In this situation, DocuSign’s weaker guidance could spark concerns of slowing growth, but 42% revenue growth YoY is nothing to turn your nose up at. DocuSign is a leader in its industry and the digital signature market is estimated to grow at a 31% compound annual growth rate (CAGR) from 2021-2028. If those estimates come to life, I wouldn’t worry too much about the short-term price movements.

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