Executive Summary

I recommended DocuSign to paying subscribers, and I failed with this recommendation.

I don't mind if the company misses analysts' estimates, although DocuSign actually beat analysts estimates on the top and bottom line.

What I have a massive issue with is if I estimate that the business is going to make a certain amount of free cash flow, and it becomes clear that my conservative estimates were too rosy-eyed.

I recommend that we sell DOCU and park this capital as cash.

After this sale, I have space in the portfolio for 2 new investment ideas.

Investment Thesis

DocuSign (DOCU) delivered poor billings in its fiscal 2026 outlook, which caused the stock to sell off by approximately 17% to around $77 per share.

This had been a business that was slowly turning around, as its billings, which are a leading indicator of revenue growth, were expected to grow this year by 9% y/y.

However, its updated guidance now points to its billings growing at around 7% y/y.

On top of that, the crucial aspect of my investment thesis had been for DocuSign's free cash flow margins to move towards 33%.

I had been fairly content with its weak revenue growth prospects, provided that its guided free cash flow margins would be reached.

Now, with fiscal Q1 2026 delivering shrinking free cash flow margins, I want to get out now and salvage my capital before the situation deteriorates too quickly.

With that in mind, let me explain the issue with why I'm stepping aside on this business.

Billings Growth Is the Issue

Before we go further, note what I said 2 April 2025:

I was fully upfront with the number one risk factor in this business, that DOCU had one strong quarter, but that there wouldn't be more to it than that.

With that in mind, let's discuss its revenue growth rates.

Here's the thing: billings drive the future revenue growth rates. And if billings are pulled lower, this means that DocuSign's ability to improve its revenue growth rates will be hindered.

This means that the best that DocuSign had to deliver was already in the quarter just reported. And the rest of its fiscal year, its revenue growth rates will slowly move in the wrong direction, starting with 8%, and probably ending with 5% y/y revenue growth rates.

This is not entirely new news to me. I knew about this potential, but I didn't know that its billings would be revised lower, and that got me by surprise.

DOCU Stock Valuation -- 16x Forward Free Cash Flow

As an Inflection investor, I'm drawn to the fact that DocuSign holds no debt. That's part of the reason why I got involved with this business to start with. On top of that, it holds about $950 million of cash and marketable securities.

This means that after the sell-off, the business holds about 6% of its market cap as cash, which will provide DocuSign with ample flexibility either to return capital to shareholders or to reinvest back in its operations.

Nonetheless, this is what I wrote on 2 April 2025:

However, in this quarter, none of that took place. In fact, its free cash flow was down approximately 2% y/y!

Given that this was a crucial aspect of my bullish investment thesis, for the business to achieve $1.3 billion of free cash flow this fiscal year, I'm very disappointed with this turn of events.

This means that its free cash flow margin was 29.8%, down from 32.7% in the same period a year ago.

Consequently, I now believe that it makes sense to downgrade my previous 33% free cash flow margin expectation to around 31% free cash flow margin for fiscal 2026.

This means that DocuSign is likely to deliver around $985 million of free cash flow. Therefore, investors are being asked to pay a 16x forward free cash flow for a business with no debt, and a very strong balance sheet, but only marginal growth.

In other words, the stock is already fairly valued, and it's a 50/50 risk-reward from this point.

The Bottom Line

I'm taking full ownership of my failed DocuSign recommendation.

I had high hopes for this business turning around, especially with its strong balance sheet and potential for meaningful free cash flow.

But when the key pillar of my thesis—expanding free cash flow margins—started to compress instead, the risk-reward profile shifted in a way I can't justify anymore.

I don’t mind if a company misses estimates, but when my own conservative assumptions turn out to be too optimistic, I have to call it like it is.

I’ve decided to close out this position and move on. There are better opportunities elsewhere, and I now have room in the portfolio to hunt for ideas with more compelling upside and cleaner setups.