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Valuation Is Starting to Be a Concern for PayPal Holdings Inc

PYPL stock is losing its favorable risk-reward asymmetry

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Another quarter, another double beat from PayPal Holdings Inc (NYSE:PYPL), another rally for PYPL stock. It was up more than 5% in early Friday morning trading and is still up more than 3%.

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That marks three consecutive quarters of double beats for the digital payments company. In fact, PayPal hasn’t missed on earnings ever since it spun off from eBay Inc (NASDAQ:EBAY) back in July 2015.

Since then, PYPL stock has gone from under $40 to an all-time high above $70 today.

The catalyst? Digital payments are hot. Mobile payments are hotter. And Venmo is hottest.

All three of those growth engines have secular growth potential and will likely provide big revenue tailwinds for PayPal into the foreseeable future. But PYPL stock now trades at a healthy premium to that growth potential. Almost too much of a premium.

Although I’ve been bullish for a while, I’m finally selling on this rally. The stock no longer offers more bang for your buck than the market, and I think that skews the risk-reward profile to the downside for the time being.

PayPal’s Accelerating Growth Narrative

It was a monster quarter for PayPal that underscored the “accelerating growth” thesis.

The total volume of dollars flowing through PayPal is growing at its fastest clip in recent memory. Total payment volume rose 30% this quarter. It was up only 26% last quarter and 25% for the prior two quarters.

Moreover, the total number of transactions happening with PayPal is also growing at its fastest clip in recent memory. The number of payment transactions rose 26% this quarter. That number has trended around 23% for the past three quarters.

Every PayPal customer is also now more active than ever before. The number of payment transactions per active account was 32.8 this quarter, up from 32.3 last quarter and 32 the quarter before that.

Overall, quarterly revenues rose 22%, faster than the 19%-20% growth rates PYPL has posted over the past several quarters. Earnings rose 31%, up from a 27% growth rate last quarter and a 19% growth rate the quarter before that.

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