DocuSign (NASDAQ: DOCU) Collapses Back To Square One

Just when you might have been starting to think the low was in for shares of e-signature tool DocuSign (NASDAQ: DOCU), they go and do something silly. Shortly after the bell rang to end Thursday’s trading session, they released their Q1 earnings report which was both wide of the mark and bearish on future reports. Q1 Non-GAAP EPS came in at $0.38, missing analyst expectation by $0.08, while revenue was able to top the consensus as part of its 25% year-on-year growth. Billings were $613.6 million, an increase of 16% year-over-year, and non-GAAP gross margin was 81% for both periods.

At this point, investors might well have thought that perhaps it wasn’t too bad of a report. Sure, earnings per share was less than anticipated, but many of the other metrics were fine. However, it looks like it was the company’s forward guidance that really took the biscuit. Total revenue for both Q2 and FY22 was below the lower end of what analysts had been expecting, and this seems to have been the main culprit for sending shares down 20% in after-hours trading.

This means they’re on track to fall to fresh post-pandemic lows, and back to the same levels they were at shortly after IPO’ing in 2018. It’s some fall from grace for what was considered a darling of the pandemic, and one of the most high profile tech stocks out there. 

Optimistic Outlook

For all that though, CEO Dan Springer still put his best foot forward with his earnings comments. He told investors that "we delivered solid first-quarter results, growing revenue by 25% year-over-year and adding nearly 67,000 new customers, bringing our total global customer base to 1.24 million. We also bolstered our leadership team with key new hires who, together with our existing team, are ensuring we're well-positioned to grow and scale our business. With over a billion users worldwide, the proven value of our products, and the significant opportunity we have ahead of us, we're confident in our ability to successfully navigate the challenges of a dynamic global environment."

It remains to be seen if Wall Street can start to buy into his optimism, but the odds are bleak on them doing so in the short term. There were probably a few of the heavyweights who half expected this week’s report to catch everyone by surprise with a solid beat across the board, and in doing so spark a summer recovery rally, like what we’re seeing with some other tech stocks right now. Indeed, the 40% rally that DocuSign shares have seen since the middle of May is perhaps indicative of investors starting to position themselves for that kind of an earnings surprise and subsequent move. But with shares set to open right down at last month’s low, if not lower, it’s back to square one for them.

For those of us on the sidelines, however, there’s probably no harm keeping DocuSign on the watchlist if for no other reason than morbid curiosity, for now at least. There probably is a price per share that makes the risk-reward profile attractive, especially for those with a long-term investment horizon, but there’s no point in trying to catch a falling knife here especially when there are more attractive tech stocks out there. 

Considering A Position

It will be interesting to see where the bears can take shares down to this time, as the mid $60s is where they ran out of steam both during the initial COVID sell-off in March 2020 and last month. If that support line doesn’t hold this time, we could be looking at a flush down towards $50 if not below. At that point would they become attractive? It’s hard to say, and investors would do well to keep an eye on shares of Peloton (NASDAQ: PTON) as a reminder of what a multi-month crash can look like, as this too was a stock that was once grabbing headlines for all the right reasons. 

To be sure, the business models are completely different, and DocuSign, with its popular business-to-business software application, undoubtedly has a brighter future ahead of itself than an exercise bike with a tablet attached. So let’s see where shares go in the coming weeks, and reassess.