It isn't always easy being the world's leading e-signature solution.
Shares of the digital agreement service pioneer DocuSign (DOCU 1.56%) recently plunged more than 40% overnight in response to a quarterly earnings report most management teams can only dream of. Results recorded during the company's fiscal third quarter (ended Oct. 31, 2021) were in many ways outstanding. That didn't stop investors preoccupied with the stock's extremely high valuation from hammering it lower.
Is the recent drop an opportunity to buy a terrific business at a relative discount or is this a good stock to avoid? If you're thinking about buying some shares of DocuSign, here's what you should know.
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Why DocuSign stock fell hard
In its fiscal third quarter, DocuSign reported revenue that surpassed expectations from the previous quarter. The market pounded the stock because billings that haven't been recognized as revenue yet missed management's own estimate.
In September, the company told investors to expect third-quarter billings to land in a range between $585 million and $597 million. Instead, the company reported just $565 million.
That miss had an outsized effect on the stock price because there's a lot of competition for digital agreement services from larger companies like Adobe and a slew of smaller players. Despite the threat of competition, DocuSign shares still trade north of 70 times forward earnings expectations. That rich valuation combined with competitive threats makes this stock hypersensitive to any signs there could be a slowdown up ahead.
Reasons to buy now
DocuSign's estimates may have gotten ahead of themselves, but that doesn't mean physical document delivery is about to mount a comeback. The company expects around $2.1 billion in subscription revenue this year, which is just scraping the surface of the market opportunity for digital agreement services. Altogether, preparing, signing, and managing contracts could generate more than $50 billion in annual sales for the DocuSign Agreement Cloud.
The company's 1.11 million customers aren't jumping ship for Adobe or smaller rivals. Net dollar retention in the third quarter worked out to 121%, suggesting existing clients are renewing and upgrading their subscriptions.
A buy now
I'm willing to chalk up the recent dip in billings to unexpected adjustments the company's sales force has had to make in response to the COVID-19 pandemic. For around 18 months, new clients frantically adapting to new work-at-home models were beating a path to DocuSign's door.
To return to 40% year-over-year growth, DocuSign's sales team probably just needs to dust off its pre-pandemic playbook. New international growth initiatives could help too. In October, DocuSign expanded its partnership with Salesforce in order to facilitate agreements around the world.
International revenue has been outpacing domestic sales but it still has a lot of room to grow. Revenue generated outside of the U.S. represented just 23% of the total in the third quarter.
At more than 70 times forward earnings expectations, DocuSign might appear overpriced at the moment. With plenty of room to grow and a strong lead on competition in the digital agreement services space, though, this stock has a good chance to grow into its steep valuation.
There's a lot of potential for volatility as analysts try to forecast DocuSign's future. If you're ready to weather the ups and downs, the recent dip looks like an excellent opportunity to pick up a great high-growth stock at a discount.
