PayPal Holdings, Inc. (PYPL) is wrapping up a historic year, posting a 115% annual return while taking its rightful place as a financial powerhouse. In retrospect, it seems ridiculous how much eBay Inc. (EBAY) resisted activist pressure to spin off the payment provider in 2015, given the offspring's market cap is now seven times larger than the former parent. It is also higher than Bank of America Corporation (BAC), Citigroup Inc. (C), and two-thirds of all Dow components.

Key Takeaways

  • PayPal has more than doubled in price in 2020.
  • The company now ranks as a global financial powerhouse.
  • This year's pandemic-induced paradigm shift should underpin growth for many years.
  • The stock may need to complete an intermediate correction before hitting new highs.

The company has benefited greatly from the COVID-19 pandemic, which has forced older demographics and other reluctant souls to give up lifelong dependence on bills and coins, and make the switch to digital transactions. In addition, lockdowns and shutdowns have forced citizens to execute more transactions through the internet, rather than in person, contributing to PayPal's torrid growth curve.

The stock sold off in early November even though PayPal beat third quarter 2020 estimates and reported an impressive 24.7% year-over-year revenue increase. The company guided fourth quarter revenue below consensus at that time, triggering a sell-the-news reaction that offered a buying opportunity in the following session. It hasn't looked back since that time, jumping more than 30% into last week's all-time high at $243.68.

Wall Street consensus on PayPal stock remains wildly bullish despite historic share price gains, with a "Strong Buy" rating based upon 26 "Buy," 5 "Hold," and 0 "Sell" recommendations. Price targets currently range from a low of $200 to a Street-high $290, while the stock will open the last session of 2020 right on top of the median $231 target. This placement suggests that PayPal is fairly valued and exposed to broad-based catalysts that may include January capital gains tax selling pressure.

A capital gains tax is a tax on the growth in value of investments incurred when individuals and corporations sell those investments. When the assets are sold, the capital gains are referred to as having been "realized." The tax doesn't apply to unsold investments or "unrealized capital gains," so stock shares that appreciate every year will not incur capital gains taxes until they are sold,

PayPal Daily Chart (2018 – 2020)

Chart showing the share price performance of PayPal Holdings, Inc. (PYPL)

A multi-year uptrend topped out in the $90s in 2018, yielding a fourth quarter correction, followed by a recovery wave that broke out to new highs in February 2019. The rally ended near $120 in July, giving way to a pullback that accelerated to a 14-month low during the first quarter's pandemic decline. The subsequent uptick confirmed the 2019 breakout, reaching 10-month resistance in May.

An immediate breakout attracted strong momentum buying interest, booking impressive gains into August, when aggressive sellers reloaded positions above $200. Four buying spikes above that barrier were turned away into November, when price action completed a fresh breakout that posted an all-time high last week. The stock has been pulling back since that time and could lose additional ground as investors take profits in early 2021. 

August into November price action has carved strong support around $200, setting up a potential low-risk buying opportunity. However, it will take another 30 down points to reach that trading floor, so keeping your powder dry for now looks like the best course of action. In addition, the monthly stochastic oscillator entered a long-term sell cycle in October, generating a bearish divergence that also suggests more aggressive selling pressure in the new year.

Divergence is when the price of an asset is moving in the opposite direction of a technical indicator, such as an oscillator, or is moving contrary to other data. Divergence warns that the current price trend may be weakening and in some cases may lead to the price changing direction.

The Bottom Line

PayPal stock has more than doubled in price in 2020 but may need to complete an intermediate correction before hitting new highs in 2021.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.