Just when DocuSign (DOCU -0.26%) stock's brutal sell-off looked like it couldn't get any worse, it did. The e-signature and electronic document company's stock fell more than 20% on Friday, following the company's fiscal fourth-quarter earnings report. This put the stock down more than 75% from its 52-week high of $314.76. The stock has essentially lost all of the gains it saw as a result of remote work and collaboration during the pandemic.
Has the growth stock's sell-off gone too far? Let's take a look.
Understanding DocuSign's fourth-quarter update
Despite the stock's sharp pullback on Friday, the company's fiscal fourth-quarter results were actually quite impressive. DocuSign's revenue rose 35% year over year during the period, hitting approximately $581 million. This was ahead of analysts' average forecast for revenue of $561 million. The company's non-GAAP (adjusted) earnings per share of $0.48 was up substantially from $0.37 in the year-ago period. Free cash flow also rose nicely, increasing from $44 million in the year-ago quarter to $70.3 million.
With results like this, some investors might be surprised the stock fell. But the reason for the stock's decline was management's guidance. DocuSign guided for a significant deceleration in top-line growth for the current fiscal year; specifically, management said it expects fiscal 2023 revenue to be between $2.47 billion and $2.48 billion. Analysts, on average, were expecting fiscal 2023 revenue of $2.61 billion. The midpoint of management's guidance range implies just 18% growth.
Image source: DocuSign.
Should investors be worried?
Based on management's optimistic comments in its earnings release and the company's decision to roll out a share repurchase program, DocuSign certainly thinks its business and its growth prospects remain healthy.
"As we head into Fiscal 2023, digital transformation and the need to agree from anywhere remains a high priority for organizations across the globe," said DocuSign CEO Dan Springer in the company's fiscal fourth-quarter earnings release. "As people begin to return to the office, they are not returning to paper."
Regarding the company's new repurchase program, DocuSign's board of directors authorized up to $200 million to be used for repurchasing its stock. "This program underscores our confidence in the strong fundamentals of our business and allows us to flexibly leverage our balance sheet to efficiently deliver returns to our shareholders," said DocuSign Chief Financial Officer Cynthia Gaylor during the company's earnings call. It usually doesn't make sense to buy back stock unless management believes its shares are undervalued, so repurchase programs are usually a sign of management's confidence in a stock's long-term potential.
Given management's confidence, the stock's lower price, and the company's strong fundamentals, investors may want to take a closer look at this stock while it's down sharply. Sure, if the company's revenue growth deceleration worsens beyond what management expects, it may be time to reevaluate the stock's long-term potential. But management indicated during the company's earnings call that some of the deceleration is simply a result of the lingering effects of the tapering of heightened demand from unprecedented lockdowns. As this anomaly period fades further into the past, there will likely be less risk of further meaningful deceleration.
