Investor demands for profitability catch tech companies flat-footed

Shares of DocuSign are off 25% in pre-market trading today after it reported earnings last night, pushing the value of shares in the e-signature company under pre-COVID levels.

Given that the market is valuing DocuSign at a cheaper price than it did in early 2020, you might think that it is struggling. Hardly. Coming off a huge period of pandemic-fueled growth, DocuSign posted 25% in top-line expansion in its most recent quarter, with revenue coming in at $588.7 million, around $7 million ahead of street expectations. Even more, the company’s growth target for its current fiscal year brackets investor expectations.

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Confused by DocuSign undergoing such a sharp repricing after reporting better-than-expected trailing growth and in-line guidance? Don’t be. DocuSign has committed the new cardinal sin of technology companies: losing more money as growth slows.

As market mania fades from 2021 highs, investor expectations are changing rapidly and it’s catching a host of technology companies flat-footed.

The shock of the end of the growth-at-all-costs era is not merely a shift from a preference for revenue expansion toward profitability. No, many tech companies are currently navigating a deceleration to their more natural rate of growth, while profit demands are rising. It’s hard to retard a growth deceleration while also making more money, but that’s what investors want. And signs abound that it’s not going well.

Pivot to profits

DocuSign’s quarter included free cash flow of $174.6 million, up from $123.0 million in the year-ago period. But at the same time, GAAP net income got worse at the former unicorn:

GAAP net loss per basic and diluted share was $0.14 on 200 million shares outstanding compared to $0.04 on 194 million shares outstanding in the same period last year.

That’s a no-no.

Tech companies are racing to avoid the same fate. The pivot to profitability — really the pivot to losing less money — is in effect around the world. A few recent bits of news make our case: