DocuSign Has Some Negotiating To Do

On Friday, DocuSign DOCU saw its shares plummet more than 42% after providing a rather weak outlook despite the e-signature software maker beating expectations for its reported quarter. However, it did recover a bit on Monday thanks to famed growth investor Cathie Wood. Wood's several ARK funds, ARK Innovation ETF ARKK, the ARK Next Generation Internet ETF ARKW and the Ark Fintech Innovation ETF ARKF snapped up 747,000 DocuSign shares using the opportunity that the stock went on sale.

Summary

The e-signature company just reported its sixth straight period of revenue growth exceeding 40% as it benefited from a remote work environment that fueled demand for electronic signatures across industries. It topped both the top and bottom-line expectations for the third quarter, but investors were more focused on what lies ahead as the company expects next quarter growth of around 30%. They were severely disappointed that the sequel isn't a continuation of 2020's blockbuster results.

Solid Third Quarter Figures

Revenue for the quarter amounted to $545.5 million, increasing 42% YoY and exceeding $531 million expected, according to Refinitiv. With earnings up 163%, adjusted earnings per share amounted to 58 cents compared to 46 cents analysts anticipated. Management said that it billed its customers 28% more compared to last year's comparable quarter.

A Weaker-Than-Expected Outlook

According to the CEO, sales teams were so caught up in meeting clients' orders that they didn't have a chance to sign up new ones. As a result, fourth-quarter revenue is expected to grow ‘only' 29% in the range between $557 million and $563 million, while Refinitiv study of analysts expected $573.8 million. While in any other company 29% would still be impressive growth, DocuSign investors were spoiled by the company's extraordinary growth results and ended up being disappointed with decelerating billings growth. Chief Executive Dan Springer thinks the company will bill its customers 23% more in the current quarter than a year ago which is significantly lower compared to this summer when it was growing twice as fast.

As the saying goes, it's always the small print that carries the sting and, in this case, it was the company's warning that demand for its e-signature software had slowed faster than it expected. In other words, DocuSign failed to foresee the pandemic tailwinds would tail off much quicker than expected, catching the company off guard as JPMorgan Chase & Co JPM analyst Sterling Auty put it.

Control What Can Be Controlled

DocuSign's value tripled in less than a year as it rocketed to a market cap of $46 billion. But according to Springer who found the market's reaction too strong, righting the ship should not take too long, since the company has managed to retain customers. The CEO will steer the boat back to earlier strategies to create new use cases for the product.

DocuSign Should Benefit From Market Expansion

DocuSign estimates the total addressable market to be $50 billion from the combined market for e-signatures amounting to approximately $25 billion, with the addition of another $25 billion for its other products such as contract lifecycle management analytics. This estimation provides the company with considerable room to run and grow.

Last year the company estimated that its signature product is six to seven times as large as rival Adobe Inc's ADBE Adobe Sign and was growing twice as fast as its product is easily integrated into existing business workings, namely Salesforce.com Inc CRM Slack, and SAP. The company's estimate of its potential market has doubled since it went public three years ago but these projections are only as good as investors' faith in the management that made them. On that front, DocuSign has some negotiating to do.

To conclude with a quote from Forbes, the world has literally consumed software more than ever with the latest 18 months being a historical moment of the technological revolution. But now, the software is eating itself as it raised the bar too high during COVID-19's ruling.

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