The exuberance over PayPal Holdings Inc‘s (NASDAQ:PYPL) solid quarterly report sure didn’t last long, but recent selloff in PayPal stock is likely to peter out soon.
The issue is that once the traders finished celebrating PYPL’s report, the nagging old concerns about margins, competition and innovation came back to drive the story.
PayPal offered evidence that it has addressed some of its flaws. And it’s not like PYPL stock is particularly pricey. But big swings are just the way this name has traded since being spun off from eBay Inc (NASDAQ:EBAY) in the summer of 2015.
PayPal stock hasn’t been around long enough to get a reading on beta — a measure of volatility — but a look at its chart shows what a roller coaster it has been. That makes this recent downturn worth considering as an opportunity to buy on the dip.
On the plus side, PYPL pumps out a steady and generous revenue stream, but isn’t yet priced that way. Ordinarily, a company with PayPal’s top-line prospects to get a fat earnings multiple. PYPL doesn’t. It trades at 24 times forward earnings.
That’s significantly more expensive than the broader market, but then PYPL stock has a more robust growth forecast. Analysts expect PayPal to generate a compound annual growth rate of 17% over the next half decade, according to Thomson Reuters. The S&P 500 is expected to run at less than half that rate.
And make no mistake, PayPal’s top line might not blow anyone away, but it’s putting up a steady record of double-digit gains. On average, analysts expect revenue to rise 16% this quarter, 17% next quarter and 16% in the next fiscal year. Again, the S&P 500 doesn’t offer any prospects like that.
PayPal Stock: More Pluses than Minuses
Investors are always anxious about PYPL’s margins. They became even more so after the company signed deals with Mastercard Inc (NYSE:MA) and Visa Inc (NYSE:V) earlier this year. True to form, transaction margins — which have been steadily declining for the last five quarters — fell once again in the most recent period to 58.7% from 59.8% in the second quarter.
On the plus side, the rate of decline is slowing down. And it was nowhere near as bad as some investors were expecting after the MA and V agreements. Perhaps the market is baking a bit too much of this into the PYPL stock price.
After all, the latest results offered more good news than bad. The company’s total payment volume grew 25% year-over-year to $87 billion. And more people are using PayPal than ever. Active customer accounts increased 11% to 192 million globally. At the same time, users are going with PayPal more often. Average interactions per customer increased to 30 from 27 YOY.
But those achievements don’t do much to make investors feel better about competition in the payment facilitation industry.
It’s not like there’s a shortage of rivals. Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) Facebook Inc (NASDAQ:FB) and Square Inc (NYSE:SQ) are also vying for a piece of the mobile payments pie.
However, the balance of evidence probably favors the bulls’ case over the bears. And that’s not just because of fundamentals. PayPal stock has found support at its 50-day moving average twice since in as many months. If this pattern holds, downside should be quite limited.
With an average price target of $46, the Street sees implied upside of 12% in the next year or so. If the company can make progress on margins alone, PYPL stock could be even more.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
