Bubble Bubble Bubble

Bubble stocks destruction continues with 30% plunge in DocuSign

Equities 7 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  As we have written about in several equity notes, the bubble stocks segment has been under enormous pressure this year and in recent weeks the destruction in market value has intensified at a blistering pace. The tailwind from the pandemic that has benefitted many technology companies is easing faster than expected and the worsening inflation outlook is making many growth investors wary of the future direction for interest rates which play an important role in equity valuations of growth stocks. We touch on DocuSign and its Q4 revenue miss last night which caused a 30% plunge in its shares underscoring the fragility in growth stocks with high expectations.


The fallout in bubble stocks show importance of balance

In yesterday’s equity note, we discussed bubble stocks and how this group of stocks have been under pressure since February as the pandemic tailwind on growth has eased and the inflation outlook has worsened causing markets to readjust their interest rate outlook. Low interest rates have been the key driver of excessive valuations in this bubble segment and now as the tide is turning investors are readjusting their exposure. As we move into 2022, we will reiterate our view on equities that we like semiconductors, commodity sector, logistics, cyber security, mega caps, financial trading companies (a play on interest rates and volatility), and battery, which most of them are plays on the physical world making a comeback against the digital world. In a rising inflationary environment our preferred themes can make growth portfolio with exposure to bubble stocks more balanced in terms of risk.

Momentum crash and Danish equities under pressure

Like our bubble basket, Morgan Stanley has their own most crowded stocks basket which has just dropped more than 10% relative to the S&P 500, the most on record since 2013 underscoring the massive destruction that is currently taking place. While Tracy Alloway from Bloomberg calls it a new “quant crisis”, our view is that it is more a classic momentum crash as momentum strategies sitting on fat gains over the past 18 months are drastically reducing positions. When we reach the bottom is very uncertain but if we are in a momentum crash then it is the illiquidity that drives the explosive price action.

Source: Twitter

In our recent string of equity notes on interest rate sensitivity and bubble stocks we also mentioned Danish equities as being interest rate sensitive together with other equity markets such as the Netherlands, Switzerland, United States, and India. But given the recent weeks price action it seems there is an overlap to the bubble stocks selloff suggesting the readjustments in equities are more profound.

Source: Saxo Group

DocuSign shares plunging 30% show fragility for growth stocks

Another sign of the stress in the bubble stocks segment of the equity market is the 30% plunge in DocuSign, the leader in electronic signature, following a Q4 (ending 31 January 2022) revenue guidance missing estimates; the revenue guidance was $557-563mn vs est. $574mn. The price reaction shows how fragile these stocks are to a small change in revenue expectations and clearly the risks associated with bubble stocks. We should point out, that DocuSign does not fit all criteria for being added to our bubble stocks basket because the 12-month forward earnings expectations are positive whereas we require those to be negative to be called a bubble stock. The revenue miss has caused sell-side analysts to drastically cut the median price target to $275 from around previously $330 against a close of $164 in extended trading yesterday.

Source: Bloomberg
Source: Saxo Group
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.