Shares of DocuSign (DOCU -0.26%) dipped more than 10% this week, according to data from S&P Global Market Intelligence. The e-signature leader didn't report earnings, but it did announce more layoffs, and its buyout talks from private equity got stalled. Investors soured on this news, sending the stock way below its reported take-out price.
More layoffs, no buyout (yet)
DocuSign was one of the pandemic leaders that have recently fallen on hard times. With fewer companies adopting e-signature technology, the company's revenue growth has slowed down considerably.
Last quarter, revenue grew by just 9%, while the company barely generated any net income. This was due to its high levels of sales and marketing spend. Now, in order to get profitable, DocuSign is laying off its sales staff, reportedly 6% of its workforce. Investors may have taken this as a sign the company is still struggling to grow, which could lead to worse earnings in the coming quarters.
On top of these layoffs, reports have surfaced that the private equity buyout from Bain Capital may have stalled. It was rumored that DocuSign was going to get taken out by private equity in a $13 billion deal, which is why shares of the stock shot higher late last year. Now, reports are saying the investors can't agree on a price with management (translation: they want to pay a lower price). Rationally, investors have sold down shares of DocuSign to a market cap of around $10.5 billion.
What should investors do now?
DocuSign stock is in a bit of no-man's-land right now.
The business is struggling and faces steep competition from larger technology players such as Adobe. Sure, it could get bought out for a premium to its current market cap at $11 billion or $12 billion (or higher). But unless you are one of the people in the negotiating room, this is a bit of a shot in the dark. Perhaps DocuSign executives will negotiate well and get shareholders a decent premium to today's share price, but it is unknown whether that will actually occur.
The stock currently has a market cap above $10 billion for a business that barely generates a profit. If the deal falls through, DocuSign has a lot of downsides, which presents a big risk for any current shareholder. It is best to stay away from this tricky situation for the time being.
