DocuSign shows risk of investing along dotted line

An account executive at the stock exchange works on his computer in the Invercasa building in Managua, Nicaragua, November 22, 2017. REUTERS/Oswaldo Rivas

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NEW YORK, Dec 3 (Reuters Breakingviews) – It’s always the small print that carries the sting. DocuSign’s (DOCU.O) shares plunged by 40% on Friday, after it warned that demand for its e-signature software had slowed faster than it expected. The market’s response is dramatic, but for investors buying stock in profitless companies buoyed by aggressive projections, brutal corrections are all part of the unspoken contract.

DocuSign’s particular problem is that it didn’t foresee how quickly a surge in business would tail off. Chief Executive Dan Springer claims his sales teams were so driven by meeting clients’ orders that they didn’t have a chance to drum up new ones. DocuSign now thinks it will bill its customers 23% more in the current quarter than a year ago – where in summer, it was growing twice as fast.

The trouble is that in a frothy market, little changes lead to big changes. DocuSign had rocketed to a $46 billion market capitalization – after tripling in less than a year – because investors were following the dotted line on some dizzying trends. Springer’s firm had 285,000 customers around five years ago, and now it has 1.1 million. It has grown from $349 million of revenue in 2017 to a forecast of $2.1 billion next year.

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The calculus of revised assumptions is unforgiving. If DocuSign could grow revenue by 30% a year for the next five years, it would end up with nearly $7.5 billion by 2027. Notch down that growth rate to 20%, and revenue increases to just $5 billion – knocking a third off DocuSign’s fair value, all else being equal. What’s more, Springer has vowed to invest “aggressively” to revive customer demand, so in the near term, profitability will probably suffer too.

Even with $5 billion of future sales, DocuSign would still have snagged a 10% share of what it says is the total addressable market of $50 billion, a thoroughly respectable result. And its estimate of its potential market has doubled since it listed in 2018. But long-term projections are only as good as investors’ belief in the management that stands behind them. On that score, DocuSign has some negotiating to do.

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– Shares in DocuSign fell 40% on Dec. 3 after the maker of contract-signing software said that demand for its products had slowed unexpectedly quickly, and reined in its estimated growth in 2022.

– The company said that it billed its customers 28% more in the third quarter than it had a year earlier and that revenue of $546 million was 42% higher year-on-year.

– DocuSign said that billings for 2022 would be up to $2.3 billion whereas in September it had forecast billings of $2.4 billion. Its revenue forecast of $2.1 billion was roughly unchanged.

– Chief Executive Dan Springer told analysts that “we did not execute in our field the way you should expect us to execute,” and pledged to invest “aggressively” in sales and training.

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Editing by Jennifer Saba and Amanda Gomez

Reuters Breakingviews is the world’s leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

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