DOCU: can’t sign off yet.
Stock Based Compensation ... Bloomberg's Daily Downer ... Results: +3.3%; vs S&P - 5.5%
DocuSign and the Fear of Missing Out
Last weekend, I wrote about DocuSign (DOCU). I built a model; tweaked my assumptions this way and that and got to the result I wanted. On Sunday morning when I wrote the column, I was sure DocuSign was a good value at $76 a share.
Here’s the background. I use a model that attempts to forecast a ten-year return on an investment by extrapolating into the future historical PE ratios and historical rates of growth in earnings, revenue, and dividend payouts. With the model I identify stocks that are for sale at a price 40% below my estimate of their fair value and I buy them.
When I’m disciplined I stick to the model. And it seems to work.
Sometimes I break discipline. I convince myself to buy something that doesn’t have a solid history (see Trulieve Cannabis) or isn’t priced at 40% below present value (see Apple and Microsoft.) That hasn’t worked as well.
There’s an old saw that says (Wall Street) investors are driven by fear and greed. For individual investors the drivers are fear and fear. Fear of losing money and fear of missing out on a chance to make money.
I realize now, 25 months into this project, that when I break discipline, it’s often because I’m afraid of missing out on a good thing.
There are a lot of things I like about DocuSign. Last Sunday, I convinced myself to buy DocuSign – even though it didn’t quite fit the model.
By Monday morning I realized that although it’s a good company – the price isn’t right. I was giving in to fear of missing out. I didn’t buy the stock.
DocuSign: the model and present value
A very abridged version of my DocuSign model is above. Right or wrong, it forecasts a $205 a share price in 2031. Discounted back to today, and marked down 40% - I should pay no more than $61.
I’ll wait to see if it gets to $61. If it does, I’ll buy it. If it never gets that low, I missed out.
Stock Based Compensation – the DocuSign example.
At my day job, our investors guard equity jealously. The more equity private investors give to management and employees the lower the investors’ eventual return will be. Simple math.
Public company boards treat equity differently. They give away a lot of it.
DocuSign uses a lot of stock-based compensation[1].
Between 18% and 19% of the company’s total expenses are the expense of stock-based compensation.
Like a lot of tech companies, DocuSign’s presentations often back out stock-based compensation, along with other non-cash expenses, and present ‘non-GAAP’ adjusted earnings. I call BS on that.
Stock awards to management and employees dilute investors. Over the past three years DocuSign issued 24m[2] shares to settle stock options and restricted stock units – dilution of about 5% each year.
I built that dilution into my model. Here’s what the model (the same one shown above) looks like both with and without this 5% annual dilution from stock-based compensation
The compounding impact of that dilution on earnings per share is significant. Significantly bad for investors in DocuSign.
A Matter of (Bloomberg’s) Perspective
Every morning I open Bloomberg.com and see this graphic view of the markets.
The default view, the one that pops up at you automatically, has looked down like this most of the year. How much better I would feel if Bloomberg served up this perspective of the same market every morning:
Results: Bleh!
Portfolio: + 3.3 %
S&P 500: - 5.3 %
This is the 25th month of a 120-month project.
The project tests a theory that, over ten years’ time, a “buy low, sell never” portfolio of stocks bought at a discount to their estimated present value will both make money on an absolute basis and outperform the S&P 500. 25 months in it seems to be working – barely.
The portfolio is outperforming the S&P 500. It’s making money – albeit not nearly enough to keep up with inflation.
This is the portfolio when the market closed on Friday.
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Check the Archives for:
Allison Schraeger, Bloomberg February 13, 2022
Alphabet April 17, 2022
Billpay.com May 15, 2022
Biogen February 6, 2022
Blackrock February 27, 2022
Blackstone February 27, 2022
Bloomberg News February 20, 2022
Boston Beer February 20, 2022
Bunge April 10, 2022
Callidus March 29, 2022
Carbon Black March 29, 2022
Coca Cola January 30, 2022
CuraLeaf April 24, 2022
DocuSign May 15, 2022
Draft Kings February 20, 2022
Draft Kings April 3, 2022
Ella Nilsen, CNN March 13, 2022
Elon Musk April 17, 2022
Eric Savitz, Barrons February 13, 2022
Expeditors March 13, 2022
FEDEX March 13, 2022
Fidelity National February 13, 2022
First American February 6, 2022
First American February 13, 2022
Goldman Sachs February 27, 2022
Google April 17, 2022
Granite Real Estate Trust January 18, 2022
Green Thumb April 24, 2022
Henry Grabar, Slate April 17, 2022
IBM January 30, 2022
Inflation January 2, 2022
Inflation January 23, 2022
Inflation January 30, 2022
Intel January 30, 2022
Jen Psaki, MSNBC April 10, 2022
Jen Psaki, MSNBC April 17, 2022
Keith Romer, Bloomberg April 3, 2022
Kinder Morgan January 8, 2022
Nutanix March 29, 2022
Phillips 66 January 2, 2022
Prudential February 6, 2022
Sangfor Technologies March 29, 2022
Silicon Valley Bank March 20, 2022
SUSE March 29, 2022
TerrAscend April 24, 2022
Trulieve February 20, 2022
Trulieve April 24, 2022
Tweedy Brown April 17, 2022
Twitter April 17, 2022
Tyson April 10, 1011
UPS March 13, 2022
Verisk April 17, 2022
Verizon January 23, 2022
Virtuozzo March 29, 2022
VMWARE March 29, 2022
Wall Street Journal April 10, 2022
Wells Fargo March 20, 2022
Western Alliance Bank March 20, 2022
Will Yakowicz, Forbes April 24, 2022
[1] https://www.sec.gov/ix?doc=/Archives/edgar/data/1261333/000126133322000049/docu-20220131.htm Page 64
[2] https://www.sec.gov/ix?doc=/Archives/edgar/data/1261333/000126133322000049/docu-20220131.htm Page 66 “Consolidated Statement of Stockholders Equity”