(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
PayPal, Inc. (PYPL), which dropped sharply during the stock market sell-off, is poised for a major rebound. Options traders are betting the stock will rise 10% in the coming weeks, bucking the bearish broader market.
Directionally, technical analysis agrees with the positive view of the options traders. The bullish sentiment comes as analysts are increasing their earnings and revenue forecasts for the company and see strong growth in the years ahead.
Betting On a Rise
Options for expiration on December 21 have seen increasingly bullish bets at the $92.50 strike price. The open interest levels have increased by four-fold over the past few days to nearly 13,000 open call contracts. A buyer of those calls would need the stock to rise to roughly $93.50 to earn a profit from the stock's price of $85.06 on November 16.
The technical chart indicates the stock is nearing a breakout, with the potential to rise above resistance at $85.75. If that happens, the stock could climb back to its previous highs of around $92.85, an increase of 9%. Additionally, the relative strength index has been trending higher in recent weeks, suggesting that positive momentum is moving back into the stock.
Forecasts for Strong Growth
One reason for the optimism is forecasts for strong earnings and revenue growth through 2020. Analysts see earnings rising by 20% in both 2019 and 2020. Additionally, revenue is forecast to grow around 17% during that same period.
Analysts have been boosting their forecasts since July, raising revenue estimates by 2% for 2020 and earnings by 3.5%.
The one negative for the stock is its valuation, trading at 2019 PE ratio of 29.5. That comes at the upper end of its historical range. But with earnings expected to grow consistently over the next few years and estimates rising, the valuation appears reasonable. Should the company continue to deliver strong results and provide reliable guidance, the stock should continue to increase in the future.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.