Shares of Docusign (NASDAQ:DOCU) are down 12.2% in Friday trading, but were lower by as much 20% in after-hours trading. Why the beatdown? The company disappointed investors with its first-quarter results, sending Docusign stock into a tailspin.
Is this the buying opportunity investors have been waiting for or a warning sign that more losses could be on the way?
The headline results looked pretty good, but there’s clearly something in the report spooking investors — especially on a day where U.S. stocks are flying higher after the release of the May jobs report. Not only is the action disappointing while the Nasdaq rallies 1.7%, but as other companies like Beyond Meat (NASDAQ:BYND) and Zoom Video (NASDAQ:ZM) surge more than 20% on their earnings reports.
Let’s look at the quarter.
Docusign Stock Earnings
Non-GAAP earnings of 7 cents per share came in three cents per share ahead of expectations, according to Zacks. However, a GAAP loss of 27 cents per share missed estimates by 3 cents. Revenue of about $214 million grew 37.3% year-over-year (YoY) and beat estimates by $5.8 million.
For the most part, the headline results check out.
The midpoint of the second-quarter guidance range calling for $218 million to $222 million in revenue hits consensus expectations of about $220 million. However, full-year guidance topped estimates. Management expects sales between $917 million and $922 million vs. analysts’ estimates of $913.6 million. Further, operating cash flow tripled YoY to $45.7 million, while free cash flow grew near 250% YoY to $30.4 million.
So where’s the issue?
To be honest, I don’t see much of one. Subscriptions grew 36% YoY, down one percentage point sequentially, while gross margins also slipped 100 basis points YoY. Billings growth slowed too, but slowing growth rates are to be expected. It’s not like DOCU stock completely whiffed on these numbers.
This looks like nitpicking to me and down a few percentage points would seem reasonable if investors opted to sell. Down 15%-plus though? That seems like overkill for what is a pretty clean quarter overall. In-line Q2 guidance and better-than-expected full-year guidance should have given some type of buoy to the stock price. Especially with support about 5.5% to 9% below its pre-earnings close.
This is the type of action I would expect from a stock that came into the print red hot and then disappointed. That certainly isn’t the case here, with Docusign stock down almost 8% from its 2018 high and ~20% from its 52-week high coming into the quarter.
Trading DOCU Stock
A really reasonable selloff to this type of quarter would have landed Docusign stock near $50. That would have kept it above range support in this $50 to $52 area, as well as the 200-day moving average. Instead, DOCU stock gapped below this area and even broke below the 61.8% retracement for its one-year range.
At the end of the day, though, we can’t fight the tape. We have to respect price, trading and investing on what the market gives us. In this case, it’s giving investors a potential long-term buying opportunity on this dip. The question is, how long will it last and how low will it go?
On the upside, I want to see DOCU stock reclaim the 61.8% retracement. If it can, it puts the 200-day moving average and that $50 to $52 support level back on the table. It will be important to see how Docusign stock acts in this situation. Does it find this area to now be resistance? That would be a bearish development and likely mean it needs more time before being considered a healthy long. The quicker it can reclaim these levels, the better.
If it can’t reclaim either the 61.8% or the 200-day, then see how it holds up to lower prices. Specifically, I want to see if this $44 to $45 area supports Docusign stock. This was a notable area during the fourth-quarter selloff. If it can’t support DOCU, then perhaps the $38’s are on the table.
The bottom line: Watch $47.78 on the upside and $45 on the downside.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
