DocuSign (DOCU)

Based in San Francisco, DocuSign (DOCU) provides electronic signature (e-signature) software. I am neutral on the stock.

Even prior to the onset of COVID-19, remote communication avenues were gaining traction. By early 2020, signing paper documents seemed quaint compared to using e-signature software, and DocuSign was at the forefront of a broader shift to remote communication and authentication services.

That shift was rapidly accelerated, of course, when COVID-19 compelled people to conduct businesses at a distance. E-signatures weren’t just a convenience anymore. They became a necessity, and DocuSign became a darling on Wall Street seemingly overnight. With that, anyone who happened to own DocuSign stock suddenly enjoyed a windfall – and hopefully, they took profits before the hype phase subsided.

When the buying frenzy was in full effect, it was practically unimaginable that DocuSign stock would fall to pre-pandemic levels by mid-2022. Yet, here we are – and now, prospective investors must assess the damage and decide whether the signs point to a better future for DocuSign.

On TipRanks, DOCU scores a 1 out of 10 on the Smart Score spectrum. This indicates a high potential for the stock to underperform the broader market.

A Deep Red Day

It’s not an exaggeration to say that June 9, 2022, was a make-or-break day for DocuSign’s investors. Prior to that day, DocuSign stock had declined from $300 in mid-2021 to roughly $87. In other words, the shareholders were undoubtedly hoping for a swift, decisive comeback.

That day, after the closing bell rang on Wall Street, DocuSign’s investors got an answer to the question of whether the stock was destined to plunge lower or rocket higher. They certainly didn’t get the answer they wanted, however.

The next day, June 10, DocuSign stock took a 24.5% haircut, sliding to around $66 and falling below late-2019 price levels. That’s a dispiriting milestone, to put it politely. So, what happened?

To find the unfortunate catalyst, we only have to look to DocuSign’s first-quarter fiscal 2023 results, which were released immediately prior to the share-price beatdown. Sometimes, markets react irrationally to earnings reports. Could this be the case with DocuSign stock?

As you might expect, DocuSign CEO Dan Springer put a positive spin on his company’s quarterly results. “We delivered solid first-quarter results, growing revenue by 25% year-over-year and adding nearly 67,000 new customers, bringing our total global customer base to 1.24 million,” Springer argued.

Analysts surveyed by FactSet had, on average, anticipated $583 million in quarterly revenue, so DocuSign’s $588.7 million was certainly an impressive result. Besides, 25% revenue growth is nothing to sneeze at, and DocuSign’s customer base is certainly sizable. That having been said, it’s unlikely that investors would dump their DocuSign shares on the same day for no reason. So, let’s dig a little deeper now.

The Clock Strikes Midnight

Apparently, some traders discovered problems in DocuSign’s Q1 FY2023 results – and at least one prominent Wall Street expert did, as well.

Indeed, Wedbush analyst Dan Ives made no bones about his bearish outlook on DocuSign stock. He gave the stock an Underperform rating, along with price-target cut from $60 to $50. Citing “management’s limited visibility, a sales restructuring that will take several quarters to complete, and a lack of near-term catalysts,” Ives declared that DocuSign’s “core growth story is now essentially over.”

That’s tough talk, but it’s not unjustified. Along with the aforementioned challenges, Ives pointed to DocuSign’s second-quarter billings guidance, which the company revised downward by around $200 million, to between $599 million and $609 million. With that outlook reduction in mind, Ives suggested that “the clock [is] striking midnight” and DocuSign must now face an “uncertain future for the remainder of FY23.”

Adding to that uncertainly are DocuSign’s first-quarter FY2023 bottom-line results. The company posted adjusted earnings of 38 cents per share, missing the FactSet analyst consensus estimate of 46 cents per share. This results also represents a drop-off compared to the prior-year quarter’s 44 cents per share.

Those numbers evidently disappointed the investing community, though Springer apparently remained “confident” in DocuSign’s “ability to successfully navigate the challenges of a dynamic global environment.” Those “challenges,” we can presume, include the return to pre-pandemic habits as COVID-19 isn’t preventing in-person document signing as much as it did a couple of years ago.

It’s fine for Springer to accentuate the positive aspects of DocuSign’s quarterly results, and to express confidence in the company’s future. After all, that’s what CEOs are supposed to do. However, calm and confidence can’t replace a convincing action plan to adapt DocuSign’s business model to a “dynamic global environment” in which companies might not rely on remote collaboration like they once had.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, DOCU is a Hold, based on four Buy and 10 Hold ratings, and one Sell rating. The average DocuSign price target is $80.31, implying 21.81% upside potential.