Here's My Plan to Trade DocuSign and It's Nothing Very Complex

Where there is demand...There will at some point be supply, even if there must first be innovation. Is there someone out there that maybe needed to either get or provide a signature at any point during the shut down? Maybe one of you needed a notary public? Yeah, they do that too. Readers may recall that DocuSign (DOCU) was an early addition back when we were creating various portfolios designed to either outperform or simply just survive during the weeks and months of venturing as far as the back yard fence... but only if the neighbor was not in his or her yard. Then one stayed a few feet away from that fence. Venturing out for a signature was not a viable option, and that said, even if your bank was on of the ones trying to stay open, it's not like the notary would be there when you were.

Coming And Going

DocuSign is set to report the firm's Q1 earnings on Thursday (this) afternoon. Consensus view is for EPS of $0.10 on revenue of roughly $281.1 million. These numbers, if realized, would amount to earnings growth of almost 43% on revenue growth of more than 31%. While at a glance, revenue growth of 31% might seem gaudy, this would be the slowest pace of growth for the firm since the stock went public. How could that be? If this is such a good "work from home", or "work from anywhere" type name?

Good question. You see, the macro-economic environment has slowed business activity significantly. Wedbush analyst Daniel Ives went into this a bit back in May. He called this firm a "core software name" in this environment, and felt that while there has probably been slippage across the software industry during the pandemic economy, that maybe IT decision makers were prioritizing the services provided by DocuSign.

Looking backwards just a bit, at the firm's fourth quarter, which ended January 31st, bit was reported on March 12th (Important, because that quarter was not impacted by the virus, but by the time the firm talked about the quarter, the panic was well under way.), we see both top and bottom line beats. More importantly, the firm increased revenue guidance at that point for both the full year as well as the quarter to be reported this afternoon.

That Was Smart

What this firm does, as I have mentioned above, is provide cloud based e-signature solutions. There is much more including the use of AI and other software products that help organize, automate, and search agreements by topic or by phrase. The lion's share of he firm's revenue is driven through the wonders of recurring revenue, or a subscription based model.

Throughout the pandemic the firm has provided software services for free for 90 days for new customers. This included not just the software but multiple educational tools. How do you win over the loyalty of customers? You be there, and you be reliable when they need you most. This was smart.

Trading The Name

Fortunately, we got into this name early enough to do very well. This is the chart that provoked my long position back when the fan was just starting to get hit.

This also means, as I have never been shy about ringing the register, that I am out of ammo as we head into earnings. Do I reload today, ahead of the digits? The shares have finally paused. Not my style though. Pretty stubborn about chasing any stock, especially one that already worked it's magic for the portfolio. The shares are trading 32% above their own 50 day SMA. A further extension of this gap would indeed surprise me.

Our favorite 12th century Italian mathematician suggests that if there is a round of profit taking, there could be a swift drop, almost as swift as was the rise in price. Then again, this is 2020, and if a prehistoric sea monster was seen fighting a giant gorilla somewhere out in the western Pacific Ocean, it would probably be a minor story.

My Plan (minimal lots)

Nothing very complex. Should the shares run hot this afternoon, I'll wish them well, and wait for another day. However, I am willing to expose myself to a limited level of downside equity risk and get paid to do it.

- Sell (write) one June 19th DOCU $135 put for a rough $4.40

- Sell (write) one June 19th DOCU $130 put for a rough $2.85.

- Sell (write) one June 19th DOCU $125 put for a rough $1.75.

Net credit: $9.00

Best case: The shares do not trade below $135 at expiration in two weeks, and the trader pockets $900.

Worst case: The shares trade below $125 at expiration in two weeks' time, and the trader ends up long 300 shares at a net basis of $127.

At the time of publication, Stephen Guilfoyle had no position in the securities mentioned.