At its IPO on 26 April 2018, DocuSign (NASDAQ: DOCU) was initially priced at $29 per share. It raised $629 million, valuing the company at $4.4 billion. By 3 September 2021, the DocuSign share price hit a high of $310, a tenfold return for initial investors.

Like most stocks with such high returns, a good portion of this success was down to luck. When the pandemic began in early 2020, the NASDAQ Composite index lost almost 3,000 points in the space of a month. Meanwhile, DocuSign was barely affected, instead rising to $264 by 19 February 2021, as globally enforced remote working massively increased demand for its online agreements and eSignature services.

But it has been volatile over the past two years. It fell to $186 by 14 May 2021, before rising back to its $310 high. It’s been falling since, losing $50 even before Q3 results were reported last week. Then on Friday, the DocuSign (NASDAQ: DOCU) share price collapsed over 40%, as investors deserted the stock over weakened growth prospects. It fell from $232 to $137, erasing much of its pandemic gains.

DocuSign share price: Q3 results

At first glance, results were robust for the technology stock. Revenue rose 42% year-over-year to $545.5 million, with most of this income derived from subscriptions. Meanwhile, billings were up to $565.2 million, a 28% increase year-over-year. GAAP gross margin increased by five percentage points, from 74% to 79% since the same quarter last year. And free cash flow rose to $90 million, while cash and cash equivalents were $908.2 million by the end of the quarter.

CEO Dan Springer commented that ‘third quarter revenue growth of 42% year-over-year and operating margin of 22% exceeded our expectations.’ He further believes that with ‘1.11 million customers worldwide, we are confident in the value DocuSign delivers in an increasingly digital anywhere economy.’

However, amongst this optimism, investors latched on to one sentence in his statement, that ‘after six quarters of accelerated growth, we saw customers return to more normalized buying patterns.’ The company predicts that Q4 revenue will be between $557 million and $563 million, while Refinitiv data shows an average analyst expectation of $573.8 million. In an earnings call with investors, Springer said that ‘the environment shifted more quickly than we anticipated.’

Hybrid model?

It appears that even if the Omicron variant causes further pressure to continue with remote working, DocuSign’s pandemic-driven hypergrowth may be over. In an investor note, JPMorgan analyst Sterling Auty said that ‘pandemic tailwinds came to a much faster than expected halt for DocuSign, catching the company off guard.’

But in an interview with CNBC, Springer said that the share price fall was an ‘overly strong reaction.’ However, he admitted that ‘we got to a place over the last year, year and a half where we were sort of fulfilling demand,’ rather than generating new demand.
DocuSign’s valuation was built on expectations for continued high growth. Now that the stock appears to be moving into a consolidation stage, it's possible that the share price fall has simply returned the stock to its fair value.

But Google has just pushed back an employee return to the office, saying that it needs to come up with a plan to develop a ‘stable, long-term working environment.’ However, Morgan Stanley Managing Director Chris O’Deir called young workers ‘nuts’ for not wanting to ‘be in the office all the time.’ With many employees prepared to resign over remote working conditions, it will take some time to determine whether remote working, a return to the office, or a hybrid model becomes the norm. If the remote working phenomenon continues beyond the pandemic, demand for DocuSign’s services is likely to increase. But a strong 'back-to-the-office' push could see a further share price fall.

It’s worth noting that the NASDAQ composite as a whole fell by 344 points on Friday. Some of DocuSign’s fall can be ascribed to wider worries over a potential Federal Reserve interest rate hike, the Omicron variant, and fears over a potential market correction.

But like fellow tech stock Zoom, DocuSign’s share price is going to be determined by the working patterns of the future. And unfortunately for investors, this variable is outside of its control.

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Charles Archer | Financial Writer, London
07 December 2021