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Can Middling PYPL Stock Break New Ground?

PayPal Holdings, Inc. (PYPL) would like to revolutionize the way commerce is conducted. But first, they must win over PayPal stockholders, who have largely been unimpressed so far with the digital payment services provider.

Can Middling PYPL Stock Break New Ground?

Returning to the financial markets this year as an offshoot after its acquisition from eBay Inc. (EBAY) in 2002, PYPL stock witnessed eager support out of the gate from Wall Street.

On July 20, 2015 — exactly two weeks after PayPal stock’s initial public offering — trading volume hit 52.3 million shares. From then on, however, enthusiasm outside of token trades has been comparatively muted.

On Friday, PYPL stock ended the week virtually dead-even, with earlier gains being erased by a consecutive series of selloffs. Momentum peaked on Tuesday, when PYPL announced that it would air a 45-second commercial during the first quarter of the Super Bowl — the National Football League’s championship finale.

It’s the company’s first major advertisement as a separate entity, and with Super Bowl commercials costing upwards of $5 million, the investment is fairly sizable. The markets appreciated the platform PayPal would leverage to share their corporate vision, with PYPL stock jumping over 3% for the day.

Continuing Worries Over PYPL Stock

Alas, there is a concerning trend that the online payment leader cannot build off of positive fundamentals. PayPal stock is down nearly 5% from its IPO and since mid-November, PYPL has traded in a very tight consolidation pattern. In fact, the biggest gain so far against its IPO price measured only a little over 10%, indicative of powerful upside resistance.

At first glance, the lethargic pace of PYPL stock is perplexing. In the second quarter of fiscal year 2015 — PYPL’s last earnings release before going public — the company reported 169 million users, while the number of transactions increased by 27% to 1.1 billion from its year-ago period.

In addition, PYPL is making it a top priority to develop smartphone apps as an alternative payment source for brick-and-mortar retailers, a strategy that has already been implemented at both Burger King and Subway.

Since only about 10% of the $25 trillion global transactions industry is from online commerce, PYPL’s overtures to traditional retailers is shrewd gamesmanship.

Paypal stock, technical analysis
Source: Source: JYE Financial, unless otherwise indicated

At the same time, there’s a reason why PayPal stock is down more than 5% since the beginning of November. Just prior to its IPO, eBay had predicted revenue growth for this year to rise between 15% to 18% for PYPL stock.

So long as the current sales trend finishes the year on a high note, PYPL should hit the lower end of eBay’s estimates.

Certainly, the odds favor the bulls, but that’s far from guaranteed. While the most recent Q3 earnings report exceeded profitability estimates, PYPL stock fell just shy of hitting analysts’ revenue target.

More worrying from the perspective of The Wall Street Journal is the decline in the company’s take rate, or the profit margin from each of PayPal’s transactions. Given the mixed performance of the retail sector during this holiday season, it’s understandable that analysts are a little leery when it comes to the possibility of earnings risk.

However, such nagging criticisms may be a case of playing Chicken Little. Take rates are negotiable, and as PYPL expands into both digital and traditional retail markets, it would be expected that margins are sacrificed in order to secure new, lucrative deals. Certainly, there’s a possibility of failure in assuming that increased revenue will make up for the shortfall stemming from declining take rates, but potential PYPL stock investors should keep an open mind.

Bottom Line for Paypal Stock

PayPal was one of the first to go to market in the online transactions industry, and as a result, 18% of all e-commerce payments are facilitated through them. Interestingly, 87% of PayPal transactions are related to travel services — not a bad situation when considering that the annual total of payments processed through the company’s mobile users well exceed $1 billion.

Finally, the percentage of users who recommend PYPL’s services is 86% — an impressive figure that is sure to assuage current PayPal stockholders’ anxieties.

Despite a lot of noise in the markets, digital payment solutions is the future of money. As such, there will be tremendous opportunities for PYPL to mine, and they are well positioned to expand into multiple business ventures.

Part of this expansion will inevitably come with initial upfront costs, and both bulls and bears will weigh in.

Ultimately, however, PayPal has largely kept pace with expectations and it’s a matter of time before PYPL stock does the same.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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