Shares in PayPal Holdings Inc (NASDAQ:PYPL) were suffering even before the post-election rout in technology stocks, but technical strength and underpriced fundamentals make any selloff in PayPal stock a buying opportunity.
PYPL stock hit an all-time high in the later part of October and it has been a tough ride ever since. Shares fell 3% between Oct. 21 and Nov. 14. Happily, the technicals appear to have kicked in.
As if on cue, PayPal stock found support at its 200-day moving average and has been climbing ever since. The next test — breaking resistance at the 50-day moving average — is in sight. If PYPL can maintain upside momentum until it passes that key level, then $40.52 will become a level of support. That could set the stage for higher lows and higher highs.
The fundamentals certainly back it up. Lost amid the broad selloff in tech stocks is that payment companies like PYPL stand to benefit from financial deregulation just as banks do. Jefferies equity research told clients in a note:
“If Trump’s general plans for de-regulating the financial services industry ends up including a repeal of the Durbin Amendment and a less-powerful CFPB, this should generally be a tailwind for the payments industry.”
That would also help PYPL with the nagging headwind of margin pressure. Investors are always anxious about the margin story here. They became even more nervous after the company signed deals with Mastercard Inc (NYSE:MA) and Visa Inc (NYSE:V) earlier this year. True to form, transaction margins — which have been steadily declining for the last five quarters — fell once again in the most recent period to 58.7% from 59.8% in the second quarter.
On the plus side, the rate of margin decline is slowing down. And it was nowhere near as bad as some investors were expecting after the MA and V agreements. Once the reality of the potential for deregulation sinks in, the market’s margin concerns will abate somewhat.
PYPL Stock Looks Good for GARP
It would help PayPal stock get the sort of premium its growth rate deserves. PYPL stock currently changes hands at 23 times forward earnings.
That’s a rather slim premium for a company with a projected compound annual growth rate of 17% for the next half decade. That’s especially true in a bull market, where multiple expansion is the order of the day.
After all, it’s delivering promising results. In the most recent quarter, the company’s total payment volume grew 25% year-over-year to $87 billion. And more people are using PayPal than ever. Active customer accounts increased 11% to 192 million globally. At the same time, users are going with PayPal more often. Average interactions per customer increased to 30 from 27 year-over-year.
That’s driving steady and above-average revenue growth. Analysts expect revenue to rise 17% this quarter, 16% next quarter and more than 16% in the next fiscal year. The S&P 500 sure doesn’t offer those sort of prospects. For all of 2017, analysts are projecting revenue growth of 5.9%, according to FactSet.
The reality of stiff competition and worries about PayPal’s ability to innovate are going to remain headwinds for PayPal stock, but it still looks poised for outperformance.
With an average price target of $46, the Street sees implied upside of 15% in the next year or so. That’s a buy in any analysts’ book. If financial deregulation does indeed come to pass, PYPL stock would be worth even more.
If nothing else, PayPal stock stakes a claim to offering growth at a reasonable price. It’s not going to blow anyone away with its top-line performance, but that’s fine. PYPL stock is not priced for that anyway. On the other hand, it’s not properly priced for the market-beating growth it does have.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.