Is Docusign stock a buy after its 40% crash?

Dan Appleby looks at Docusign stock after it crashed on Friday. Is it now a bargain US growth stock to add to his portfolio?

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It was a brutal day on Friday for Docusign (NASDAQ: DOCU) stock as it crashed over 40%. When a stock gets crushed as much as this there’s almost always a catalyst. This time, Docusign released its third-quarter results for its fiscal year 2022.

The results clearly didn’t live up to the market’s expectations, and the shares repriced to reflect this. Let’s take a look to see if Docusign stock is now a bargain for my portfolio.

Docusign’s results

Docusign offers e-signature solutions for users through its cloud-based software suite. The pandemic created huge demand for its e-signature service when most people were working remotely.

The third-quarter results reflected this demand. Revenue grew 42% compared to the same period in fiscal year 2021 (the 12 months to 31 January 2021). Subscription revenue grew even quicker at 44%. The growth in revenue meant adjusted earnings per share surged to $0.58, which was up from $0.22 in the prior year. This is a spectacular growth rate in earnings of 164%.

All seems ok so far. But with any company, the stock is priced on future expectations. This is where Docusign’s update began to falter.

Docusign’s outlook

The key part was when management said: “After six quarters of accelerated growth, we saw customers return to more normalized buying patterns, resulting in 28% year-over-year billings growth.”

The company has recognised that the last six quarters have been excellent. But now, the guidance suggests that this hyper growth phase is over. It’s easy to understand why, as workers are beginning to return to the office.

The fact that the billings growth is slowing is a concerning sign. Billings includes sales that have been booked but not recognised as revenue yet, so it’s a forward-looking indicator for the business. 

The company then guided for fourth-quarter revenue of $560m (taking the midpoint in guidance). Consensus estimates before the update were for fourth-quarter revenue of $574m, so a fair amount higher than the company now expects.

The clear pattern here is that the company has benefited hugely over recent quarters and growth has been spectacular. But it looks like it won’t be in future.

Is Docusign stock a buy?

I think Docusign is a great business, and its software services will continue to be used from here regardless of the pandemic. It’s showing signs of being a quality stock too. The operating margin was 12.4% in fiscal year 2021, and management said this increased to 22% in the third-quarter results, exceeding expectations.

But it comes down to valuation for me. On a forward price-to-earnings ratio, the shares are valued on a multiple of 77. This is just too high for me to get interested, taking into account the slowing growth rate. Although the share price fell over 40% on Friday, I think it might decline further.

It’s not the first company that has released an update containing respectable growth, only for the forward guidance to disappoint. It seems that many US growth stocks are priced to continue on a hyper growth phase, so the outlook has to be strong to warrant the high valuation.

In summary, I think Docusign is a good business, and I might revisit the stock if it becomes cheaper.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has recommended DocuSign. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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