When PayPal (NASDAQ:PYPL) fell into $180 last fall, it presented a decent value. This, however, turned out to be merely a rest area for the bears. Because once they broke through support there the selling intensified for another 50%. The haircut in PYPL stock was shocking, but the opportunity from it could be epic. The brave who bought this last dip are already smiling up 30%.
New investors now should also have profits in the long term. The window of opportunity is not over, but a bunch of the easy short-term work has already happened. From here it will require a bit more work from the bulls.
The hideous descent in the stock is misleading for the investors. Despite how ugly the chart has looked, PayPal’s fundamentals have never been stronger.
The demand for the financial technology (fintech) sector is hot and will remain so for about a decade. The world is in the process of digitizing its financial transactions at a more rapid pace than ever. The pandemic lit a new spark under it like never before. The whole trend is now in high gear, almost at a panic’s stride. This is not to say that there won’t be bearish stints along the way. We’ve just seen an extreme example of bad jags for PYPL. But from here there should be better days ahead.
The rally back will face resistances from prior areas that the bulls tried to hold. For example, if it gets back to last fall’s neckline at $180, there should be a wall of sellers waiting. So, investors need to realize the levels from which they are chasing. Buying a dip into extreme support is the better course of action.
In this case, PayPal stock has already recovered 28% just last week. This raises the possibility that new investors are a bit too late in the short term. Years from now this may not matter much, but for the next few weeks it does.
Support for PYPL Stock Should Be Solid
This week there are a bunch of great companies bouncing off of extreme support levels. This suggests that there is a floor below, and the bulls can use that to recapture higher levels.
However, much of this rally was too much last week, so there could be short-term selling. One way to trade this choppy action is to use options. Selling bull put spreads, for example, can work perfectly now. These are bullish positions that do not require rallies to profit, and they leave room for error.
In the end, moderation should be the key to success. Regardless of you conviction in an individual stock, we have to acknowledge the overall risks. The world is on alert from potential war headlines. This makes for an ever-present threat to stocks. I’m confident that the selloff test makes for a reliable support, but it’s not foolproof. Let the correction on Feb. 24 be proof of how fast things can go south quickly.
Bottom Line on PayPal
Beyond these general issues, the opportunity in PYPL stock is golden.
The fundamental metrics are beyond reproach. Revenues and gross profits have almost doubled in five years. Even though the company delivered aggressive growth, it did so with profitability in mind. (The company currently has a net income of $4.2 billion). Moreover, the traditional metrics also suggest humble valuations.
The price-to-earnings ratio for PayPal stock is 32x, and the price-to-sales ratio is 5x. These are humble metrics, especially for an aggressively growing company. Owners of PYPL shares at these levels are realistic with their expectations. Much of the froth is already out after such a hideous correction from the 2021 levels.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.