Readers of mine know that I’ve been very bullish on PayPal (NASDAQ:PYPL) stock in 2020. Heading into the year, I said time and time and time again that PayPal stock was going to deliver big returns in 2020 and rush to $150.
One pandemic and five months later, PayPal stock has indeed rushed to levels just shy of $150. Year-to-date, shares are up 36%. Even if the year ended today, it would mark PayPal stock’s second-best annual performance ever.
Needless to say, the stock has been on fire. But I think this fire will start to cool off here and now.
PayPal is benefiting from a broad shift towards online, contactless payments amid the novel coronavirus pandemic. But the company is also exposed to lower consumer discretionary spending trends. The former is fully priced into PYPL stock. The latter is not.
As such, at current levels, I think the risk-reward on the stock is no longer that favorable. While I don’t see shares collapsing from here, I do see this rally falling flat over the next few months.
A Mixed Bag
The fundamentals underlying PayPal stock are a mixed bag right now.
Meanwhile, on the negative side, PayPal is still a consumer payments company, and consumer discretionary spending is falling off a cliff, with retail and food sales over the past three months down 8% year-over-year, including a 22% decline in April. It should be no surprise, then, that PayPal reported slowing volume and revenue growth in the first quarter.
In other words, when it comes to PayPal’s fundamentals, you have some good and some bad.
Ultimately, this mixed bag means that while PayPal will continue to grow at a steady rate amid this turbulent economic era, growth will likely be slower than normal, as evidenced by first quarter numbers.
That would be fine if PYPL stock was at $100. But up near $150, the stock is priced for much more than slow-and-steady growth.
In the face of the coronavirus pandemic, I have not made many adjustments to my long-term model for PayPal.
That’s because the long-term growth drivers underlying this company remain robust, while near-term effects of slowing consumer spend and rising e-commerce engagement will largely offset one another.
I still see PayPal as a 15%-plus volume and revenue grower over the next few years, driven by rising e-commerce sales and gradually expanding market share in the e-retail payments vertical. Margins should expand considerably thanks to disciplined cost control, implying profit growth potential in the 20% per year range.
Under those assumptions, my model pegs PayPal’s 2025 earnings per share potential up at $8.50. Based on a 25-times forward earnings multiple — which is an average multiple for bigger payments stocks like Visa (NYSE:V) — that equates to a 2024 price target for PYPL stock of over $210.
Discounted back by 10% per year, that implies a 2020 price target of roughly $145 — right around where shares trade hands today.
Bottom Line on PYPL Stock
PayPal stock is a long-term winner. But in the near-term, the stock looks maxed out.
Shares are up 36% year-to-date and trade at all time highs. The valuation is stretched. Sentiment appears to ignore weak consumer spending trends.
All in all, I expect the red-hot rally in PYPL stock to start to cool off here. Don’t be surprised if shares fall flat over the next few months.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.