PayPal Is Up 140% Since March Low, Is It Too High?

Following a 140% rise since the March 23 lows of this year, at the current price of around $203 per share we believe PayPal Holdings Stock (NASDAQ: PYPL) has reached its near-term potential. PayPal Holdings, which operates a worldwide online payments system that supports online money transfers, has seen its stock rally from $85 to $203 off the recent bottom compared to the S&P which moved around 55%. The stock is leading the overall markets by a wide margin, as investor sentiment is positive about the company due to higher transaction volume during the previous two quarters. Further, the stock is up 88% from levels seen at the end of 2019.

PayPal Holdings stock has surpassed the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower this year than last year.

Some of this rise of the last 2 years is justified by the roughly 36% growth seen in PayPal’s revenues from FY 2017 to FY 2019, which translated into similar growth in Net Income.

While the company has seen steady revenue and earnings growth over recent years, its P/E multiple hasn’t changed much. We believe the stock is unlikely to see a significant upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard What Factors Drove 176% Change in PayPal Holdings Stock Between FY 2017 And Now? has the underlying numbers.

PayPal Holdings’ P/E multiple changed from around 49x in FY 2017 to just below 52x in FY 2019. While the company’s P/E is close to 97x now, there is some downside when the current P/E is compared to levels seen in the past years – P/E of just below 52x at the end of FY 2019 and around 49x at the end of FY 2017.

So what’s the likely trigger and timing for the downside?

PayPal Holdings is a leading digital payments company that enables digital and mobile payments on behalf of merchants and consumers worldwide. Due to the Covid-19 crisis, people have preferred digital payment mediums over the traditional ones. As a result, the company witnessed a significant spike in its transaction volume over the last 2 quarters. However, as the economy inches towards normalcy, the higher transaction volume is likely to normalize, leading to a drop in the revenue growth rate. This is expected to pressure PayPal Holdings’ stock price.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

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