DocuSign’s Stock Collapse Sets Low Bar for Earnings

(Bloomberg) — Expectations for DocuSign Inc.’s earnings are so low after a series of blowups at the one-time pandemic winner that some investors are wondering if it can get any worse.

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Shares of the company, which provides electronic-signature services used in real estate and other businesses, have plunged 65% this year, the second-worst performance in the Nasdaq 100 Index. As with other companies that surged in the Covid-19 era — including Netflix Inc., Zoom Video Communications Inc., and Peloton Interactive Inc. — investors have scaled back their estimation of its growth prospects in a reopened economy.

The stock fell 2.6% on Thursday.

DocuSign’s second-quarter results are due after the market close, and follow a trio of catastrophic reports, each of which resulted in stock drops between 20% and 42% in the subsequent session. Options traders expect another big post-earnings swing, with an implied one-day move of 18%. However, the shares now trade at some of their cheapest valuations on record, and the disappointments could enable DocuSign to more easily surpass low expectations.

“Investor sentiment for DocuSign is among the most negative I’ve seen, and that means a low bar for earnings,” said Hilary Frisch, senior research analyst at ClearBridge Investments. “It’s hard to call the near-term fundamental outlook positive, but we’re optimistic about the long-term story, and the valuation is compelling on that basis. We think we can take advantage while others might be too afraid to jump in.”

After tripling in 2020, the stock fell 31% last year and the selloff picked up steam in 2022, with shares hitting a three-year low on Tuesday. Analysts forecast sales growth of 17% this year, down from 40% to 50% over the past three fiscal years. DocuSign’s struggles contributed to Chief Executive Officer Dan Springer stepping down in June.

The drop has DocuSign trading at about 31.9 times forward earnings. That’s above the 21 multiple of the Nasdaq 100, but near the all-time low for DocuSign, which went public in 2018, and below consumer-staples companies like Costco Wholesale Corp or Clorox Co.

Analysts have been paring back their estimates. The average prediction for full-year adjusted earnings per share is down by 20% from six months ago, according to data compiled by Bloomberg, while the view for revenue has fallen 7.4% over that same period.

But in a glimmer of hope that the worst might be priced in, most of those revisions happened months ago. Brokerage predictions for earnings have stayed steady over the past month, while the consensus on sales hasn’t budged since late March. And even after the estimate cuts, analysts see double-digit revenue growth for the company over the next few years.

“Coming out of this downturn, my bet is that DocuSign is going to grow faster than these staples or the S&P 500,” Frisch said. “I don’t have a ton of names in my universe with this kind of growth, trading at a valuation that rivals traditional defensive industries.”

The big cloud hanging over DocuSign, and all growth stocks, is the economic environment. Federal Reserve Chair Jerome Powell recently indicated the US central bank was likely to keep raising interest rates, spurring a broad decline in tech. In another headwind to valuations, the yield on the 10-year US Treasury note is around 3.25%, more than double where it was at the start of the year.

For Scott Yuschak, managing director of equity strategy at Truist Advisory Services, this kind of backdrop is a key reason to keep avoiding the stock.

“The valuation isn’t ridiculous anymore, but I wouldn’t say it’s cheap, especially since it doesn’t have as much cash flow as we’d like and we don’t know what demand looks like going forward,” he said. “Given the uncertain growth outlook, it is difficult to step into a name like this.”

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