What happened
DocuSign (DOCU -0.78%) stock fell 63.6% during 2022 due to slowing growth and difficult market conditions. The company is dealing with headwinds in the post-pandemic economy, and its expensive valuation was unsustainable without ongoing massive growth. As conditions deteriorated and investors fled the tech sector, DocuSign took a beating.
NASDAQ: DOCU
Key Data Points
So what
It was an eventful year for DocuSign, which included the unexpected departure of CEO Dan Springer, who was replaced a few months later with growth tech veteran Allan Thygesen. The stock also experienced numerous high-profile analysts upgrades and downgrades as it navigates a challenging economic environment.
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Slowing growth has been a major theme across the economy and technology sector in recent quarters. One year ago, DocuSign reported 42% annual revenue growth. In its most recent quarter, that rate had shrunk dramatically to 18%.
This trend became apparent in the first half of 2022, as investors digested disappointing results and gloomy forward-looking commentary. The stock showed some life after better-than-expected third-quarter earnings, but that wasn't nearly enough to overcome the overwhelming reality of slowing growth.
While there are a number of clear threats to DocuSign's fundamentals, its biggest issue was probably the unrealistic expectations and unsustainable valuation placed on the company coming into the year. DocuSign was one of the darlings of the pandemic bull market, as investors piled into stocks involved in remote work, telehealth, e-commerce, and other industries that looked relatively immune to pandemic-related issues.
While these businesses held promise, many of the stocks were bid to unreasonable valuations. At the end of 2020, DocuSign's price-to-sales ratio was nearly 60, up from only 25 just 12 months earlier. Its forward P/E ratio was over 700. The company's impressive 57% sales growth rate was not nearly high enough to justify those valuation ratios, even if the pandemic permanently transformed business operations.
At the start of 2022, DocuSign still had a price-to-sales ratio above 35, a forward P/E ratio above 200, and price-to-cash-flow close to 90. It was expensive by every metric, and it was primed to drop a long way if interest rates spike or growth slowed. Both of those things happened simultaneously, and investors were forced to think more rationally about the stock's value.
Now what
Now that some of the irrational exuberance has died down, DocuSign could be priced for gains. A slowdown was always inevitable after the pandemic boom accelerated the transition to remote work and collaboration services. With those catalysts in the rearview mirror, DocuSign continues to report growth while producing free cash flow. Its forward P/E ratio still isn't exactly cheap at 48.5, but it's finally reached a level that allows for long-term gains if the company can execute over the next few years.
You're probably out of luck if you're hoping for the stock to quickly recover last year's losses. It would have to climb around 200% this year, which is highly unlikely to happen so quickly, even if we see the economy and stock market turn around. Patience is necessary here, even for the most bullish investors.
