DocuSign, Inc: The Risk Of Dangerous Overvaluation

As Mr. Valuation I am constantly warning about the risk of what I refer to as dangerous overvaluation. The 40% plus drop of DocuSign, Inc.’s (DOCU) stock price last Friday represents a quintessential example. There were no fundamentals that could possibly support the lofty valuation of DocuSign, Inc. Nevertheless, the stock price quickly collapsed on what was perceived as a weak revenue forecast.

Here is a quote courtesy of Chris Ciaccia SA news editor reporting the company’s guidance: “In a statement, DocuSign (DOCU) Chief Executive Dan Springer hinted that business that has risen during the COVID-19 pandemic may be coming back down to Earth. After six quarters of accelerated growth, we saw customers return to normalized buying patterns,” Springer said. MarketWatch published an article on December 3 titled: “DocuSign stock craters to worst day on record after ‘one of the biggest SaaS whiffs in recent memory.” Here is how the article reported the issue: “Citi Research analyst Tyler Radke wrote that DocuSign delivered “one of the biggest SaaS [software-as-a-service] whiffs in recent memory with total billings growth of 28% significantly below [the] 34% guide” during the fiscal third quarter. DocuSign’s billings outlook for the fiscal fourth quarter was 22% at the midpoint, which came in significantly below the 32% consensus figure Radke cited in his note to clients.”

Although this is certainly a mess, I believe billings growth of 28% was still exceptional performance. However, the problem was that the company was trading at a ridiculously high valuation that needed far better growth to support it. When valuation gets crazy investors need to beware.

FAST Graphs Analyze Out Loud Video

Disclosure: No position.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

© F.A.S.T. Graphs

Read more commentaries by F.A.S.T. Graphs