PayPal (NASDAQ:PYPL) stock has been on fire all year long. In 2020, PayPal stock is up 45% on the back of accelerating e-commerce and digital payment adoption, due to the novel pandemic.
Through most of PayPal’s rally, I’ve been bullish on it. Indeed, towards the beginning of the year, I said that PYPL stock would rally to $150 in 2020.
But the shares now trade closer to $160, and we are less than halfway through the year.
So it’s time to be less bullish on the stock.
There’s nothing wrong with the company’s fundamentals. It’s still a dominant player in the hyper-growth digital payments space. And it can generate rapid revenue and profit growth for the next several years. That strong growth will result in powerful gains by PYPL stock.
But there is something wrong with the stock’s valuation today. At $160, PayPal stock is fully valued. And the shares could come under pressure over the next few months as e-commerce and digital payment adoption growth eases with the reopening of brick-and-mortar stores.
As a result, I believe the huge 2020 rally of PayPal’s stock is on its last legs. I’d avoid chasing the stock at its current levels.
PayPal Is a Long-Term Winner
I’ve said it before and I’ll say it again: PayPal stock is a long-term winner because it’s a pure play on the non-cyclical transition away from cash and towards digital payments.
In essence, over the past decade, consumers pivoted aggressively towards online shopping. Consumers can’t buy things with cash online. So, out of necessity, digital payment platforms like PayPal were born to facilitate e-commerce.
Now PayPal is the main payment platform of global e-commerce. Global e-retail sales in 2019 came in at $3.5 trillion. PayPal’s total payment volume measured $712 billion. So PayPal effectively controls 20% of all e-retail sales.
That has been true for the past several years. It will remain true over the next several years, too, as PayPal continues to improve its core product and branch out into mobile payments with Venmo.
As a consequence, PayPal is a dominant pure play on the digital-payment revolution. To that end, the company will sustain robust revenue and profit growth over the next few years, keeping PYPL stock on its long-term uptrend.
PayPal’s Valuations Risks Will Be Highlighted by Its Slowing Growth
Although PayPal stock is a long-term winner, it does tend to get ahead of itself every once in a while. That’s what happened in January 2018,August 2018, and July 2019.
June 2020 appears to be another one of those times.
Today the stock is as richly valued as it’s ever been, across every major valuation multiple. Its trailing sales multiple is above ten, a record high and about double its historical average. The forward price/earnings multiple is near 50, also a record high and more than 50% above the historical average. The trailing P/E multiple, the price-book multiple and the price-EBITDA multiple are all also in the same situation.
I understand that growth stocks can have long periods of extended valuation as long as the news flow surrounding them remains overwhelmingly positive.
That’s exactly where PayPal is today. Consumer spending is rebounding. E-commerce sales are soaring. The company reported its strongest month ever in April. And its growth and engagement trends have only improved since then.
But that news flow still stop being so positive soon.
The hysteria about Covid-19 is moderating. The physical economy is reopening. And as restaurants, shops and theaters reopen over the next few months, e-commerce growth and digital payment growth will moderate. Consequently, PayPal’s record-high growth rates will fall.
Against that backdrop, the stock’s valuation will be a problem, so PYPL stock could give back some of its gains.
The Bottom Line on PayPal Stock
PayPal looks like a classic case of near-term pain, long-term gain.
Over the next few months, I expect the stock to be choppy as investors worry about its valuation and as Covid-19-related e-commerce tailwinds ease. The dust from that choppiness will settle within a few months. Once it does, the stock will consolidate, bottom, and then power to new highs.
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.