DocuSign (Nasdaq: DOCU) shares were down more than 40% following the company's Q4 guidance which came in below expectations despite it beating expectations on the top and bottom-line. DocuSign provides a platform for e-signatures.
Of course, this business exploded higher during the pandemic, and it was one of the best-performing stocks in 2020. But in 2021, it's one of the worst-performing stocks due to its high valuation, slowing growth, the economy returning to normal, and a rotation from growth to value stocks. Growth stocks had a big correction, earlier this year, between February and May. Some names went on to make new highs, while others underperformed and are now making lower lows in many instances.
Inside the Numbers
In Q3, DocuSign reported $0.58 in earnings per share which topped expectations of $0.46 per share. Revenue also beat expectations at $545.5 million vs $531 million. This equates to 42% revenue growth for the company due to more remote work and more industries adopting its software.
However, shares were selling off due to its forecast that missed estimates. The company sees Q4 revenue coming in between $557 million and $563 million. In contrast, analysts had consensus expectations of $573.8 million in Q4 which would mark a deceleration to 30% revenue growth.
The company acknowledged that its growth was slowing at a much faster pace than the company and investors had expected. From the start of the pandemic, revenues had accelerated from a 36% growth rate to nearly 60%.
Some market participants may be mystified by the extreme reaction in DocuSign's share price especially given that Q3 results topped expectations and the company's revenue miss was quite modest. However, this is why valuation and multiples matter.
Even after its more than 50% drawdown, shares remain quite expensive with a price to sales ratio of 23. These valuations can only be justified if shares are in hyper-growth mode. Any stumble that injects uncertainty has the potential to lead to a major correction as we've experienced.
Many bears had been pointing to DocuSign as an example of the market's egregious valuations. However, they were frustrated for many months as shares kept going higher while revenues were accelerating. Similarly, bulls may be tempted by the stock's big decline, but a meaningful rally will be tough while revenues are decelerating.