DocuSign (DOCU 3.11%) fell 17.4% in January, according to data from S&P Global Market Intelligence. There was no major news about the company, but shares took a beating as investors continued to pull capital away from growth stocks and work-from-home pandemic stocks. High valuation, rising interest rates, and improved management of omicron variant outbreaks all played a major role. The forces behind DocuSign's moves become much clearer when its stock chart is compared to that of Zoom Video Communications (ZM 1.77%).
DocuSign is struggling with the combination of brutal market forces and unimpressed investors. The company's December earnings report underwhelmed investors. Despite the company topping estimates for the third quarter, DocuSign's outlook was considered disappointing. Just as we saw with other work-from-home stocks, investor expectations rose to unsustainable levels during the early stages of the pandemic. The stocks are taking a beating as things become more rational.
The prospects of Fed tapering and rate hikes are also bad news for growth stocks. Investor risk appetite is falling, making it harder to maintain exceptionally high valuation ratios. As capital flows toward value stocks, some high-flyers of the past two years are suffering.
DocuSign is a great example of this trend in action. Its forward P/E ratio fell from 80 to 58, and its price-to-sales ratio dropped from nearly 16 to 12.5.
These are the potential buying opportunities that investors search for, but it's important to confirm that DocuSign can turn it around based on long-term fundamentals.
DocuSign doesn't report earnings again until March, so the next month will be dictated by the market for growth stocks and pandemic stocks. Its current price-to-sales ratio looks reasonable below 12. A forward P/E close to 50 might seem a bit rich during Fed tapering, but its 42% growth rate places its PEG ratio at a reasonable 1.2. Even if it slows to the 25% growth rate being forecast by analysts for next year, the current price is fair.
It's likely that DocuSign will dip further as the market reacts to ongoing interest rate hikes. For long-term investors who are excited about the company's growth catalysts, a temporary dip shouldn't be enough to scare you off.