PayPal Stock Seen Surging on Robust Growth

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

PayPal Holdings Inc. (PYPL) shares have soared over the past year with the stock rising by over 50%, easily topping the S&P 500’s increase of 11.6%. PayPal has even outperformed shares of rival payment processor Visa, whose stock has risen by almost 41%. Now options traders see shares of PayPal rising by more than 7% from their closing price of $73.99 on May 4, to about $80. 

Shares of PayPal are nearly 13% off their highs from late January around $85.50, after eBay said it would move away from PayPal as its primary payment processor. While the options traders are betting on shares rising, the technical chart suggests the stock may be heading lower. (For more, see also: PayPal Seen Falling 15% on Loss of Biggest Customer.)

PYPL Chart

PYPL data by YCharts

Bullish Options Bet

The options set to expire on September 21 are suggesting shares of PayPal rise to about $80, using the $72.5 strike price. On Friday, May 4, there was a purchase of 14,300 call contracts, at the cost of $6.60 per contract. It was a massive wager with a dollar value of about $9.5 million. The stock would need to rise to $79.10 to break even, approximately 9% from the $72.5 strike price.

Strong Results

The company reported better than expected first-quarter results on April 25, with earnings topping estimates by 5.4% at $0.57 per share, while revenue beat by about 2.6%, at $3.685 billion. Following the strong results, analysts have raised earnings estimates by about 2% to $0.56 per share, while upping revenue estimates by 1.4% to $3.802 billion.

Not Overvalued

Shares of PayPal appear to be expensive, trading at roughly 26 times 2019 earnings estimates of $2.82 per share. But when considering the growth rate, shares are not all that expensive. Earnings for the company are seen growing by roughly 21% in 2019 on strong revenue growth of nearly 16%. When adjusting for growth, it gives the stock a PEG ratio of about 1.25.

Technically Weak

The technical chart suggests shares could be heading lower, not higher. The stock price broke a long-term uptrend in February, which also then served as technical resistance when the stock retested the trend in mid-March. Additionally, the pattern in the chart appears to be a descending triangle, a bearish technical pattern. Should the stock fall below technical support at $69, it would likely trigger another wave of selling. 

The options traders are betting PayPal’s stock continues its strong performance of the past year. Should strong earnings and revenue growth materialize, it gives the traders plenty of reasons to support their bullish view.  

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.

 

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