PayPal (PYPL) Needs Rapid Growth to Sustain Lofty Levels

PayPal Holdings, Inc. (PYPL) is set to report third quarter earnings after Monday's closing bell, with analysts looking for a profit of $0.94 per share on $5.41 billion in revenue. If met, that would mark a 54% earnings per share (EPS) increase compared to the same quarter in 2019. The stock rallied more than 4% after the payment company beating second quarter top- and bottom-line estimates in July and added another 20 points before topping out just above $200 in September.

The company has benefited from the pandemic push to paperless and contactless financial transactions, which are likely to mark long-term paradigm shifts away from physical currency, checkbooks, and pockets full of spare change. However, PayPal stock has rallied more than 80% so far in 2020, raising legitimate concerns about valuation. Investors have taken note in the past two months, carving a potential double top pattern. 

The 2020 return hasn't deterred wildly bullish Wall Street consensus, which now stands at a "Strong Buy" rating based upon 15 "Buy" and 1 "Hold" recommendation. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $201 to a Street-high $290, while the stock is set to open Monday's session $12 below the low target. This disconnect suggests that targets have been set too high, failing to account for rapid share gains and the lofty 85.4 price-to-earnings ratio (P/E ratio).

PayPal Long-Term Chart (2015 – 2020)

The company spun off from parent eBay Inc. (EBAY) in July 2015, opening at $37.72 and entering a brief uptrend that topped out at $42.55. It sold off through the IPO opening print in August, marking out a trading range into new support at $30.00. Price action held within those boundaries into a May 2017 breakout that attracted strong momentum buying interest, more than doubling in price into the January 2018 high at $86.32.

The stock added a few points through the summer and turned tail into year end, holding support in the $70s, and took off in a 2019 rally that stalled above $120 in the third quarter. The stock returned to that level in February 2020 and broke out, but the rally failed in a vertical decline that posted a 15-month low in March. The subsequent recovery wave unfolded at the same trajectory as the prior decline, returning PayPal stock to the first quarter high in May.

PayPal Short-Term Chart (2019 – 2020)

An immediate breakout carved steady progress into early August when the rally stalled just above $200. September and October breakout attempts failed, dumping long-term relative strength indicators into sell cycles that predict continued weakness into the first quarter of 2021. Even so, the uptrend should remain rock-solid as long as price holds the September low at $171, which is slowly aligning with the 200-day exponential moving average (EMA).

The stock fell below the 50-day EMA for the first time since Sept. 28 on Friday, raising the odds that it will test range support in coming sessions. The on-balance volume (OBV) accumulation-distribution indicator failed a breakout at the same time as price in October, increasing risk ahead of Monday's post-market confessional. A positive reaction could remount the 50-day EMA, which marks the dividing line between short-term bull and bear power, while a negative reaction would complete the double top.

The Bottom Line

Bears hold a modest advantage heading into PayPal's third quarter earnings report on Monday evening.

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