PayPal stocks came under pressure in the near term after the second quarter results.
However, PayPal's revenue is expected to grow by 20% this year.
Drivers of long-term growth in the digital payments and crypto space should provide headwinds for PYPL stocks.
Shares of the leading financial technology heavyweight PayPal (NASDAQ:) have fallen after its July 28 release. After a record high of $310.16 on July 26, PYPL stock is currently hovering around $275, more than 10% lower than last week's peak.
Despite the recent drop in prices, we remain optimistic about PYPL stocks over the long term. Today we discuss how investors might consider including the stock in their portfolios.
Long-term tailwind for PYPL stocks
California-based PayPal offers merchants and consumers digital payment solutions. Offerings include PayPal, PayPal Credit, Braintree, personal payment platform Venmo, international money transfer company Xoom, iZettle, Hyperwallet, and the recently acquired Chargehound and Happy Returns.
Founded in 1998, PayPal has become a dominant player in the digital payments industry. After splitting from eBay (NASDAQ:) in 2015, PYPL pursued an aggressive growth strategy and innovative approach.
Highlight recent statistics:
"The transaction value for the global digital payments market was $5.44 trillion in 2020 and is expected to reach $11.29 trillion by 2026, growing at a CAGR of 11.21% over the 2021-2026 period."
As of May 2021, PayPal had more than 400 million active customer and merchant accounts worldwide. This means that the company's growing network of consumers and merchants is one of the main catalysts for revenue growth in future quarters.
According to Emergen Research, PayPal ranks third in revenue among all leading digital payment companies. Second quarter financial results showed the top rose 17% year-over-year (YOY) to $6.24 billion. Non-GAAP net income was $1.36 billion in the second quarter of this year, representing 8% year-over-year growth compared to the second quarter of 2020. GAAP growth for the fiscal year will be 20% and 21. %, respectively.
Therefore, PayPal's current market cap of $319.5 billion may also grow in future quarters.
Readers may be interested to know that PayPal's main competitors are JPMorgan Chase (NYSE:), Visa (NYSE:), Mastercard (NYSE:), and Fiserv (NASDAQ:).
About the Q2 results, PayPal CEO Dan Schulman said:
"After a record year, we continued to deliver strong results in the second quarter, reflecting some of the best performances in our history… PayPal has clearly evolved into a vital service in the emerging digital economy."
However, he also noted that eBay Marketplaces are no longer served by PayPal, and the statistics reflect this development.
Since October 2020, PayPal has also integrated cryptocurrency into its digital transactions, allowing US-based users , , and . In the second quarter, the Venmo platform saw robust crypto trading.
Investor interest in digital currencies is growing worldwide. Earlier in 2021: “The average daily cryptocurrency trading volume has dramatically increased to $109 billion per day.” As one of the first digital platforms to enable crypto transactions, PayPal will continue to benefit from the growth in crypto transactions.
In late July, rumors that Amazon (NASDAQ:) might be entering the crypto space sparked cheers for investors in Bitcoin and many altcoins. The surge in prices came as the market spotted a job listing from Amazon that hinted at the tech giant's potential move. Such short-term fluctuations in digital currencies are the order of the day. But they also show how much the market is interested in these developments.
Of the 51 analysts polled on Investing.com, PYPL stocks are expected to outperform. The median 12-month price target of $320.15 would represent a return of more than 17% from current levels.
Despite the optimistic outlook for the coming months, many investors are wondering if now would be an opportune time to enter PYPL stocks. We think the recent price drop is likely to end soon. Therefore, investors may begin to find value around current levels.
As we noted, PayPal stocks have lost about 10% of their value since the Q2 results were released, providing a better entry point for buy-and-hold investors. However, there could still be a further pullback to the $270 level, or even lower.
Technical charts show that short-term momentum indicators are oversold. While they may remain oversold for a long time, PYPL stock will most likely trade sideways — especially between $260 and $280 — in the coming weeks until it builds a base around those levels.
At that point, we could potentially expect another bull leg to begin that could push PYPL stocks to new highs. The long-term technical trend is still ongoing, indicating a buy.
As part of the near-term sentiment analysis, it would be important to look at the implied volatility levels for PayPal options, which typically show traders the market's view of possible moves in a security. However, it does not predict the direction of movement.
PYPL's current implied volatility (IV) is 26.7, which is below the 20-day moving average of 31.1. In other words, implied volatility is trending down. While the current IV level could change, for now expect the jerkiness in the PYPL stock to decrease.
3 Possible trades
1. Buy PYPL shares at current levels
Investors who are not concerned with daily price movements may want to consider investing in PYPL stocks now.
As of August 4, as we write, the PYPL share is $272.74.
Such buy-and-hold investors should hold this long position for several months as the stock may attempt to hit the all-time high of $310.16.
Assuming an investor enters this trade at the current price and exits around $310, the return would be just over 13%.
Investors may also consider placing a stop loss at about 3-5% below their entry point.
2. Protective put purchase
Readers who are optimistic about PayPal stocks, but remain nervous about a further decline in the near term, should consider buying a protective put in addition to their stock holdings.
For example, the trader can buy an out-of-the-money (OTM) put option, such as the PYPL October 15 250 strike put option.
This option is currently offered for $5.60. So it would cost the trader $560 to own this put option, which expires in just over two months (i.e. the maximum risk for the trade). But buying this option would give PayPal investors who also hold the stock some protection, especially if the stock or the broader technology sector were to come under pressure.
This trade would even break at $244.40 on the day of expiration (excluding brokerage commissions).
3. Buy an ETF with PayPal at the top
Many readers of this column are familiar with the fact that we regularly cover exchange-traded funds (ETFs) that may be suitable for buy-and-hold investors . Readers who don't want to invest capital in PYPL stocks, but still want significant exposure to the stock, may want to consider buying a fund that keeps the company as its leading name.
Examples of these ETFs include:
iShares U.S. Industrials ETF (NYSE:): The fund is up 15.1% YTD and the weight of PYPL stocks is 6.3% in the ETF;
ETFMG Prime Mobile Payments ETF (NYSE:): The fund is up 3.8% YTD and the weight of PYPL stocks is 6.2% in the ETF;
First Trust Jones Internet Index Fund (NYSE:): The fund is up 14.2% YTD and the weight of PYPL stocks is 5.3% in the ETF.
Bottom Line
PayPal has become one of the most important fintech names, especially in digital payments. The crypto transactions are also growing. Therefore, PYPL stocks are likely to deliver significant gains in the coming years. Buy-and-hold investors could investigate the company further with a view to buying the dips.
