As Mr. Valuation I am constantly warning about the risk of what I refer to as dangerous overvaluation. The 40% plus drop of DocuSign, Inc.’s (DOCU) stock price last Friday represents a quintessential example. There were no fundamentals that could possibly support the lofty valuation of DocuSign, Inc. Nevertheless, the stock price quickly collapsed on what was perceived as a weak revenue forecast.

Here is a quote courtesy of Chris Ciaccia SA news editor reporting the company’s guidance: “In a statement, DocuSign (DOCU) Chief Executive Dan Springer hinted that business that has risen during the COVID-19 pandemic may be coming back down to Earth. After six quarters of accelerated growth, we saw customers return to normalized buying patterns,” Springer said. MarketWatch published an article on December 3 titled: “DocuSign stock craters to worst day on record after ‘one of the biggest SaaS whiffs in recent memory.” Here is how the article reported the issue: “Citi Research analyst Tyler Radke wrote that DocuSign delivered “one of the biggest SaaS [software-as-a-service] whiffs in recent memory with total billings growth of 28% significantly below [the] 34% guide” during the fiscal third quarter. DocuSign’s billings outlook for the fiscal fourth quarter was 22% at the midpoint, which came in significantly below the 32% consensus figure Radke cited in his note to clients.”

Although this is certainly a mess, I believe billings growth of 28% was still exceptional performance. However, the problem was that the company was trading at a ridiculously high valuation that needed far better growth to support it. When valuation gets crazy investors need to beware.

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