What happened

Shares of DocuSign (NASDAQ:DOCU) were crushed in early trading Friday, plunging as much as 41.4%. As of 10:42 a.m. ET, the stock was still down 40.4%.

The catalyst that crushed the e-signature provider was its latest financial report. While DocuSign's revenue and earnings beat estimates, several factors suggest rapidly decelerating revenue growth.

So what

For its fiscal 2022 third quarter (ended Oct. 31), DocuSign delivered revenue of $545.5 million, up 42% year over year, driven by subscription revenue of $528.6 million, up 44%. This resulted in adjusted earnings per share (EPS) of $0.58, surging 163% from EPS of $0.22 in the prior-year quarter. 

Person electronically signing a document.

Image source: Getty Images.

To put those numbers in context, analysts' consensus estimates were calling for revenue of $532.6 million and EPS of $0.46. 

The company's billings, which include sales that have been booked but not yet recognized as revenue, climbed to $565.2 million, up 28% year over year, slowing from 47% growth in the second quarter. 

Now what

Given DocuSign's seemingly robust performance, what caused the stock to plummet? Seems the culprit was DocuSign's decelerating billings and weak fourth-quarter outlook.

The digital signature provider is guiding for revenue of $560 million at the midpoint of its guidance range, which would represent growth of roughly 29% year over year, well below analysts' consensus estimates of $573.8 million. Additionally, DocuSign is forecasting billings of roughly $653 million, while analysts were expecting $705.4 million. 

CEO Dan Springer said the weakening demand was particularly disappointing after the "exceptionally high growth rates at scale" DocuSign has delivered since the beginning of the pandemic.  "After six quarters of accelerated growth, we saw customers return to more normalized buying patterns," Springer said. 

To add insult to injury, Wedbush analyst Dan Ives downgraded the stock to neutral (hold) from buy, lowering the firm's price target to $200 from $340. In a research note titled "Clock Strikes Midnight on Hyper-Growth Story," Ives said customer buying behavior "appeared to change overnight." 

Given DocuSign's dominant position in the e-signature market, this is likely a temporary hurdle and a long-term buying opportunity for patient investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.