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Why DocuSign Stock Is a Smarter Meme Trade

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It’s hard to understand what makes a stock a meme stock, but ubiquity would seem like a good criterion. The more popular the product, the more popular the stock should be.

Yet DocuSign (ticker: DOCU), whose electronic signature technology is replacing the old way of signing documents with pens, has an anemic price compared with popular meme stocks like GameStop (GME) or AMC Entertainment Holdings (AMC).

DocuSign’s stock is up 7% this year, compared with a 2,227% gain for AMC, a movie theater chain, and 1,506% for GameStop, which sells videogames.

The disconnect between the stock of a company at the leading edge of technology and companies with arguably archaic offerings is worth addressing. But first let’s consider a phenomenon so unusual that it may be the modern version of tulip mania.

The meme stocks have intrigued seemingly everyone. Goldman Sachs, for example, recently released a substantive report on retail trading volumes to help clients understand how retail investors—people referred to by Wall Street’s pros as “dumb money”—have made so much off the stocks of seemingly anachronistic companies.

The meme stocks’ returns are so enormous that many wealthy investors are considering buying call options on the stocks to participate in the party—or buying put options to prepare for a massive price crash. There’s just one problem: Options on meme stocks are so expensive that the stocks would have to continue their extraordinary gyrations higher, or implode like neutron bombs, for the trades to prove profitable.

In the spirit of the moment, we will try to draw inspiration from the meme stocks without embracing them, which brings us back to DocuSign. Its technology is seemingly everywhere. Companies electronically send documents that need signatures over email, or through some secured connection, e-signatures are captured, and voilà. The process is so easy that people complain if they must provide so-called wet signatures—and especially notarized ones.

Those of you mesmerized by memetics might consider betting on DocuSign in anticipation that it will cease languishing later this year, say around the time it reports fiscal second-quarter earnings in September. The company just reported good earnings, but the stock probably weakened due to a rotation away from the stay-at-home stocks that were popular during the Covid-19 pandemic. Yet DocuSign is almost certainly more than a fad.

According to the company, it has more than 500,000 paying customers and hundreds of millions of users worldwide, including seven of the top 10 global technology companies, 18 of the top 20 global pharmaceutical companies, 10 of the top 15 global financial-services companies, and 800 federal, state, and local government agencies.

With DocuSign stock around $237.75, aggressive investors could sell the September $240 put for about $20 and buy the September $250 call for about $15. The trade pays investors $5 for agreeing to buy the stock at an effective price of $235, while positioning them to profit from gains above an effective price of $245.

During the past 52 weeks, DocuSign has ranged from $143.66 to $290.23. Shares are up 61% over that period, compared with 32% for the S&P 500 index.

The big risk is that the stock falls below $235, which would require investors to cover the put at a higher price or to buy the stock at the put strike price. If the stock surges to, say, $265 at expiration, the call is worth $15. If the stock takes out the old high, the calls are worth even more.

Think of the approach as a mature meme trade.

Originally Posted on June 10, 2021 – Why DocuSign Stock Is a Smarter Meme Trade

Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.

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