Shares of DocuSign (NASDAQ:DOCU) have cratered 32% year-to-date. The fall in the stock price accelerated after the company that manages electronic agreements gave weak Q4 guidance that was below Street expectations.
In contrast, the Nasdaq (NASDAQ) stock index has gained 12.5% year-to-date.
Are investor concerns regarding the stock justified? Let’s see. But first, let us look at how DocuSign performed in Q3.
In Q3, while the company’s billings increased 28% year-over-year to $565.2 million, it appeared that the rate of growth slowed down versus 47% in the second quarter. The billings growth rate also fell short of the company’s guidance of a growth rate between 33% to 36%.
The company defines billings as “total revenues plus the change in our contract liabilities and refund liability less contract assets and unbilled accounts receivable in a given period.”
Dan Springer, CEO of DocuSign commented, “As we move through Q3 and into the second half of the year, we saw demand slow and the urgency of customers’ buying patterns temper. While we had expected an eventual step-down from the peak levels of growth achieved during the height of the pandemic, the environment shifted more quickly than we anticipated, and these were the primary contributors to our billing results in Q3 and our outlook for Q4.”
DocuSign expects billings to grow between 21% to 23% year-over-year in Q4 and to be in the range of $647 million to $659 million, well below Wells Fargo analyst Michael Turrin’s expectation of a growth rate of 32%.
Another point of concern for the stock when it came to its Q3 results was the pace of customer additions.
According to analyst Turrin, DOCU added only around 60,000 customers in Q3 while throughout FY21, the company added 70,000 to 90,000 customers every quarter.
The analyst commented on the slowing pace of customer additions, “While the recent pace was expected to prove tough to sustain, we still think net adds above pre-covid levels are likely on a go-forward basis (~20-30k per quarter pre-covid), given the improved scale/market presence, greater geographic reach, and larger go to market organization.”
Turrin was, however, positive about the company’s international expansion, as international revenues made up 23% of the company’s total revenues of $545 million in Q3.
However, the analyst pointed out that while the company’s management remained confident that there is still a significant market opportunity and was working to address sales issues, certain concerns remained.
For Turrin, the main question was whether this was a near-term bump on the company’s roadmap for growth, “or if demand has fundamentally slowed.”
As a result, the analyst was in a wait-and-watch mode with a Hold rating but lowered the price target from $275 to $180 (19.2% upside) on the stock.
Rest of the Street is cautiously optimistic about DocuSign with a Moderate Buy consensus rating based on 9 Buys, 7 Holds, and 1 Sell. The average DocuSign stock price prediction of $209.08 implies upside potential of 38.4% to current levels.
Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.
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