Contrarian Play: Signing Off On DocuSign

Slowing Growth Is A Killer For DocuSign 

DocuSign NASDAQ: DOCU is a great company with years of high-level growth ahead of it but there is a major problem nagging the market. The company’s growth was boosted by the pandemic and it looks like the peak is passed. The Q2 results and guidance are good but show YOY growth is decelerating from the +58% peak set in the first fiscal quarter of the year to below 50% in the second quarter and below 40% in the 3rd quarter guidance. With the comps getting increasingly difficult it looks like growth could slow into the 20% range or lower and that brings the valuation into question. The company is trading at 180X this year’s earnings which is a hefty price-tag for such a slow-down in revenue growth. 

Docusign Beats And Raises, But It’s All Relative 

DocuSign is still growing by leaps and bounds but the harsh reality is that growth is slowing and coming at a higher cost. The company reported $511.84 in net consolidated revenue for a gain of 49.6% over last year. The revenue beat the consensus estimate by 490 basis points and is up more than 100% over the past two years showing just how strong the company’s growth has been. Revenue gains were driven by a 56% increase in subscription revenue and 47% increase in billings, all great news except for the overall slowdown in growth. 

Moving down the report, the company posted a 400 basis point improvement in adjusted gross margin that in turn helped drive strength on the bottom line. The catch is that GAAP earnings of -$0.13 missed the consensus by $0.04 but there are some mitigating factors to be aware of. The GAAP miss is due in large part to an increase in sales, marketing, and R&D expense that are expected to aid results in future quarters. The adjusted earnings of $0.47 are more than double last year’s result and beat the consensus by $0.07. 

Turning to the guidance, the guidance is good as well, discounting the fact growth is expected to slow. The company is expecting $526 to $532 million in revenue for the 3rd quarter compared to the $520 consensus. This assumes YOY growth will slow more than 1000 basis points from the prior quarter at the high end of the range and is no catalyst for buyers. 

The Analysts Still Like DocuSign 

The analysts still like DocuSign if the activity indicated by MarketBeat’s analyst tracking tools is any evidence. At least 12 sell-side analysts have come out with notes either reiterating already-bullish ratings or raising the price target. The consensus of analysts is that this stock should be trading near $315 or about a 7% upside from recent price action. The high-price targets are closer to $350 and we see this stock trading there if not for the issue with slowing growth. Ultimately, the market may not care but until price action confirms that idea we are hesitant to get bullish on this stock. 

The Technical Outlook: Docusign Is At A Top 

Shares of DocuSign may not be at “the” top but they are certainly at a top. The price action post-release has been volatile and, so far, confirmed the presence of resistance at $310. If this level holds as resistance share prices are likely to move down to $280 at least. The $280 level is the real worry, a break below there could take the stock down to $260 and $240 where we think the price is more reasonable.