Updating Docusign Beliefs

This should be pretty easy, just compare my priors (https://discussion.fool.com/docusign-priors-34920245.aspx) to what they reported (https://investor.docusign.com/investors/press-releases/press…).

Prior Belief: Docusign’s Revenue will come in around 520m (up 52% YoY and 10.9% sequentially). I wouldn’t be devastated with 515m as long as the guide is strong.
Update: They came in at 511.8m…which is a tad disappointing at best.

Prior Belief: Docusign’s Billings will be at least 600m (like RunnerGuy said). Maybe I should say a range of 600m - 620m…
Update: It was 595m. Not the strength or upside surprise I was hoping for.

Prior Belief: Docusign will add between 80,000 and 100,000 New Customers.
Update: They added about 65,000. They said this would continue to be strong, so I don’t think they drop back to 30,000 or anything, but I’m not sure what to expect going forward. Maybe 50,000 - 75,000 per quarter is reasonable. You’d like to see a little more (or at least on the high side of that range) since they’re spending up on salespeople to go after the opportunity.

Prior Belief: Docusign’s Enterprise Customers and customers with ACV > $300k will be up around 10% each from their levels of 136,000 and 673 last quarter. Frankly it wouldn’t bother me if these grew 8% and it wouldn’t get me too excited if they grew 12%. But it’s nice to see them going up of course!
Update: 148,000 was a 9% increase on Enterprise, and 714 was just a 6% increase on ACV > 300k. That plus the slight downtick in NRR may mean that customers aren’t begging DOCU to take more of their money. Again, not a huge problem here, but slightly disappointing.

Prior Belief: Docusign will raise its FY Revenue Guide to at least 2110m and its FY Billings Guide to at least 2450m. Again, that’s just assuming they add slightly more than they did last quarter.
Update: These came in at 2088m and 2429m respectively. Again, have to call that disappointing.

One of my lesser priors was that FCF would tick up. It certainly did – from 123m in Q1 to 161.7m. To end on a positive, this company is a profit machine, and only getting better.

Conclusion
So, every single major belief update was at least slightly disappointing. (The minor beliefs were mostly pleasantly confirmed.) Granted, my expectations were that Docusign could sustain some momentum from its breakout the last several quarters. But it seems they are returning to a more normal, steady pace. Their business is strong, but others are faster. I mean, I can’t sell a company like Snowflake when they’re growing at 105% because of my future-looking concerns, and then turn around and give Docusign a pass when they’re growing at 50% and the slow down is present tense. Yes, the expectations for Docusign are way lower. Night and day. But I’m looking for companies that will outperform expectations. Docusign is probably just meeting them, and that usually leads to boring returns. I don’t see this company as fundamentally undervalued or exploding or…well, it’s a fine, even strong enterprise. Doesn’t mean it’s one of the best ideas I can find.

I don’t plan to sell out, because I do believe Docusign shares are a better bet than holding cash. But I will certainly reduce the allocation. For top positions, I hope I can do better.

Bear

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Bear,

It is not my intention to clutter up the board, but felt a public thank you was warranted for writing these “belief” posts on your companies. They are clear, concise and completely removed from any emotion. They state the facts as they are known today, don’t get caught up in a sexy tech story, future “what ifs”, or even some outrageous potential TAM 10 years from now. As with any message board, posts and replies can drift away from black and white evaluation into comments about pre-determined insider selling, lock up expirations, seasonality excuses due to irrelevant comparisons, past returns and long-in-the-tooth turnaround catalysts that never come to be. In our concentrated portfolios we have to make tough decisions, removed of emotion, and your recent writings have been a welcomed refresher as I look inward for reasons I’m trailing many of the returns I’ve seen posted of late. Thank you.

Brandon

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Bear, thank you for these detailed “Prior Belief” / “Updated Belief” reports. I love seeing this type of insight from another investor!

That said, I want to propose a slightly different perspective on DocuSign (DOCU), in particular when compared to Snowflake (SNOW), and I am curious what you think of the perspective.

**PaulWBryant:**So, every single major belief update was at least slightly disappointing. (The minor beliefs were mostly pleasantly confirmed.) Granted, my expectations were that Docusign could sustain some momentum from its breakout the last several quarters. But it seems they are returning to a more normal, steady pace. Their business is strong, but others are faster. I mean, I can’t sell a company like Snowflake when they’re growing at 105% because of my future-looking concerns, and then turn around and give Docusign a pass when they’re growing at 50% and the slow down is present tense. Yes, the expectations for Docusign are way lower. Night and day. But I’m looking for companies that will outperform expectations. Docusign is probably just meeting them, and that usually leads to boring returns. I don’t see this company as fundamentally undervalued or exploding or…well, it’s a fine, even strong enterprise. Doesn’t mean it’s one of the best ideas I can find.

I agree that both companies companies reported earnings that were a minor disappointment, but I see the two earnings reports in a very different light.

Snowflake was a darling of high growth investors since before the IPO.
DocuSign has never received widespread fame as a high growth company.

Snowflake works with an exciting new technology (big data).
DocuSign works with an incredibly boring detail of life (signing contracts).

Snowflake has been a public company for only 1 year and has appreciated in price 29%.
DocuSign has appreciated in price 59% in the same time period.
DocuSign has been a public company for about 3.4 years and appreciated in price 716%.

etc.

In my eyes, the implication of these differences is that the market has likely priced a lot more hope for future high growth into the price of SNOW, even at the time of the IPO, than into the price of DOCU. In turn, even a small miss by Snowflake is a far bigger indicator of a potential problem than for DocuSign.

Like you, I was a little bit disappointed in DocuSign’s latest earnings report. However, the more I think on it I wonder if my expectations for the far faster growing companies we often invest in here has had me holding DocuSign to an unfair standard. I am not thrilled with DocuSign’s earnings report … but the more I think on it, I am not dissatisfied either.

End result?

I exited Snowflake but will keep my small position in DocuSign (7%) for now. DocuSign has been a reliable investment and I believe there is a good chance we have not seen the last of their high growth days.

I may be wrong.

I am curious to hear any feedback or contrary opinions!

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Hi Bear,

First, I thoroughly enjoy your prior belief/update style - it encourages a very objective way to approach earnings on our companies, a mechanism to replace emotion and the subjective with a better, a priori framework. Second, I thought your last line was interesting:

“I don’t plan to sell out, because I do believe Docusign shares are a better bet than holding cash. But I will certainly reduce the allocation. For top positions, I hope I can do better.”

For some, holding any cash at all is a sin. If this is the case, then the question is not “Is Docusign better than holding cash?” but rather, does it deserve a place in your portfolio at all? Saul is typically under 10 equities and laments when he gets too many “tails”. I usually hold 15-20 equities, where the top 10 constitute about 75% of my holdings. How deep would your roster have to be for Docusign to be on the team? For me, a lot deeper than 20 equities now.

The key for me is not being in emotional love with any stock. It allows me to feel fine selling out completely when my objective expectations aren’t met. I also like to think I can check my ego, too, and buy back in if growth accelerates again (I make mistakes, too).

RWW

(Shouting out to borngiantsfan in a friendly rivalry way, “May the best team win this weekend, and may they be wearing BLUE”)

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-Docusign is an un-sexy one-trick pony that is ONLY growing around 50% a year.

-The market viewed it as mostly a COVID stock that saw a lot of demand pull forward. However, it’s shown that it can grow pretty steadily in the 50%ish range, which is no small feat

-However, this one trick pony only has a PS of around 35 vs a PS in the 50-70 range for some of our other SaaS favorites

-It’s a good Portfolio stabilizer so I’m sticking with it for now at with an allocation of around 4-5%

-I might change my mind and put the money in something accelerating such as DDOG, MNDY, ZI, or ASAN

-Once CLM starts to move the needle and the TAM expands by a huge factor, things could really start to get interesting.

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Thanks Bear,

I too enjoy your Belief/Update posts - though it would also be helpful if you explain your reasoning for your Belief numbers so I can understand how you arrived at the figures.

For example, what was the rationale you used to believe/expect that Revenue would come in at 520M?

What I do for companies that regularly beat their own guidance is use the average beat over high guidance for the past 4 quarters. In this case that is 24.75M - rounding up to 25M plus 485 (high end guide) = 510M.
They came in at 511.8. Not exciting, but it wasn’t disappointing vs my expectation.

Maybe my model isn’t great, and wondering what others do to estimate what the beat will be. Apply prior quarters’ growth rates to the current quarter expectation? which may be just as valid as my average beat method.

I got a similar result with the Billings, FY Rev Guide and FY Billings Guide they reported – again, in line with what my model indicated, so not disappointing but not super exciting either.

Agree completely that the customer figures were disappointing.
Though I counter that with:

  • Continued growing EPS (0.12, 0.17, 0.22, 0.37, 0.44, 0.47)
  • Solid/improving GM (74%, 76%, 78%, 78%)

I, like RWW, try not to get emotionally tied to my stocks, though I do tend to give a little more leeway to companies that while “only” growing at 49% a year show increasing non-GAAP earnings and improving GM’s. And the market likes them too.

I have several “portfolio stabilizer” stocks (to use FoolishJeff’s term) with mid-high 40%-50% growth and increasing EPS that have done quite well for me – maybe not quite the returns of the Upstarts and CRWD’s, but they also don’t have as large of a downturn when rotations occur.

I enjoy continuing to learn here – even at my above average age :wink:

All the best,

BornGiantsFan – looking forward to the games this weekend

And a shout-out to Robworldwide - Whoa Nelly, we have a new season now. Giants and Dodgers are tied– not only with the same MLB leading record, but also head to hear (8-8). When is the last time this has happened? Watching on TV tonight (my parents have my tickets) but will be there Sunday

And if Max Muncy hits another home run tonight I just may rip the head off my Vin Skully bobblehead (not really, I love Vin).

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That’s a really great rundown of earnings, Bear. Thanks for sharing the before and after views.

I have been generally concerned that high valuation stocks are getting punished post earnings if results were not stellar and beat+raise. Docusign has traded up post earnings and I believe this is a good sign for the stock. I consider it a premium valuation stock, just like Snowflake. It’s what you get for investing in growth. I am a SNOW holder but have been on the sidelines with DOCU. Frankly, I view its valuation vs. growth momentum as less risky than SNOW. If there is any slowdown in SNOW’s business, the stock will come falling down hard. I’m inclined to start a position in DOCU vs. add to SNOW. SNOW’s 100%+ growth is great, but so is DOCU’s 50% plus growth, especially relative to the EV/Revenue multiples. DOCU also has much stronger margins.Take a look at how these two companies compare, in addition to a couple of other SaaS names: https://viz.wiijii.co/chart/?id=-MimlYsDkun8qjgF9ema

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