Get Paid 8.6% to Buy PYPL at a 30% Discount – Here’s How
At about $57.66 a share, PayPal (PYPL) is trading about 37% below its 52-week high.
Do you think PYPL stock is a good long-term bet at current levels? What about at a 30% discount at about $40 per share? If you think that is a steal, and have some cash ready to go, here is a trade.
8.6% annualized yield at 30% margin of safety, by selling Put Options.
- Sell a long-dated Put option expiring 1/15/2027, with a strike price of $40
- Collect roughly $188 in premium per contract (each contract represents 100 shares)
- That’s about 4.6% annualized yield on the $4,000 you’re setting aside for the possibility of buying the stock
- This cash parked in a savings or money market account will earn an extra 4.0%, taking the total yield to 8.6%
- And you give yourself a chance to buy PYPL stock at a deeply discounted price of $40
However, this is not the only stock strategy in town. Trefis High Quality Portfolio is a sophisticated framework designed to reduce stock-specific risk while giving upside exposure.
Possible Trade Outcomes: You Win Either Way
| Stock Price Outcome | What It Means For You |
|---|---|
| PYPL stays above $40 | You keep the full $188 premium – 4.7% extra income over the next 371 days on cash that might otherwise earn you 4.0% or less. You never buy the stock and simply walk away with the cash. |
| PYPL closes below $40 | You’ll be obligated to buy 100 shares at $40. But thanks to $188 premium, your effective cost basis is just $38.12 per share – a roughly 34% from current level. |
But to hold this trade with conviction, you want to see long-term upside in the stock. Because if it comes to it, you want to be excited about buying the stock cheap.
First, you want fundamentals to check out. For details, see Buy or Sell PYPL Stock or check PayPal Investment Highlights
Second, you want to better understand competitive advantage and industry tailwinds. Below is what specifically gives us the conviction.
Why Hold PYPL Stock Long-Term
Despite intense competition and slowing user growth, PayPal remains a global leader in a secularly growing industry (digital payments). The company generates substantial free cash flow, is aggressively buying back shares, and has a strong brand. If assigned, we would own a highly profitable company with a powerful network effect that is navigating a transition phase. The long-term shift away from cash provides a durable tailwind for the business.
Competitive Advantage
We classify PYPL’s economic moat as NARROW, with the primary source being Network Effect
- PayPal possesses a significant two-sided network with 432 million active user accounts and over 30 million merchant accounts, creating a powerful competitive advantage.
- The company demonstrated pricing power by increasing fees for U.S. merchants in August 2021 and again for its Buy Now, Pay Later services in late 2024, citing alignment with economic changes and enhanced features.
- Market share remains substantial, with one source citing a 45.52% share in payment processing, significantly outpacing competitors like Stripe. However, another source indicates Stripe has a lead in the ‘payment-management’ category, highlighting intense competition.
- Active account growth has stalled and seen declines in recent quarters, which the company attributes to shedding ‘minimally engaged’ or ‘low-quality’ customers to focus on driving higher activity levels with existing users.
- The brand has strong ‘mindshare,’ with the term ‘PayPal’ being used informally as a verb to describe sending money electronically, indicating its status as a default standard in online payments.
See PayPal Full Analysis.
Industry Tailwind
The industry tailwind is STRONG, with a CAGR projection of 15.4% (Finacle)
Secular Trend: Shift to Digital Payments & E-commerce
Key Risks: Intensifying competition from players like Stripe and Adyen and increasing regulatory scrutiny regarding antitrust, data privacy, and anti-money laundering (AML) rules.
Financial Guardrails
Cash Generation: Positive Free Cash Flow
Balance Sheet: The company has a manageable net debt position, with total debt of approximately $11.4B well covered by operating cash flow (56.2%) and a significant cash and short-term investments position of $10.8B. Bankruptcy is not a significant risk.
Not comfortable with options or stock-specific trades? PORTFOLIOS are even better.
Portfolios Beat Stock Picking
Individual stocks are unpredictable. A smart portfolio keeps you invested, limits downside shocks, and provides upside exposure
The Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming its benchmark that includes all 3 – the S&P 500, S&P mid-cap, and Russell 2000 indices. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.