(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
PayPal Holdings Inc. (PYPL) has soared 20% this year even as the stock has swung wildly up and down along the way. Now, PayPal is poised to climb even higher, by about 8% by the middle of October based on bullish options bets. PayPal reports earnings during that period. Options traders were bullish on PayPal in August, too, and their bets turned out to be right. (See: PayPal Traders Bet Stock Will Jump 7% in One Month.)
One reason for the bullish outlook is that analysts forecast strong third-quarter results in October.
Today, one bullish sign is that the $95 strike price call options set to expire on October 19 are seeing increasing levels of activity. This reflects bets that the shares will rise. In fact, the number of open calls has tripled to 21,000 contracts since the end of August. For the buyer of those calls to earn a profit, shares of PayPal would need to increase to $95.75, a gain of almost 8% from the current price of around $89.
There's more bullish evidence. The volume of call options at the $90 strike price outnumbers the bearish open puts by a ratio of more than 7 to 1. (See: PayPal Stock Is Alerting Bullish Trading Activity.)
PYPL Quarterly Actual EPS data by YCharts
One reason for the bullish sentiment is that analysts are forecasting robust growth for PayPal when it reports its third-quarter results next month. Analysts estimate earnings will rise by almost 18% and revenue by more than 13% to $3.7 billion. PayPal has a history of beating earnings and revenue estimates, topping expectation six quarters in a row.
Upping Price Targets
Analysts share traders' optimism and see the stock rising by more than 10% to an average price target of around $98. Since the beginning of 2018, analysts' average price target has increased by more than 21%. Given PayPal's record of topping expectations, the pressure will be on the company to exceed estimates again.
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.