Investors in fintech giant PayPal (NASDAQ:) have seen the stock's value plummet 18% since the start of the year. In comparison, the index, of which the PYPL share is a part, has so far returned about 29%.
On July 26, PYPL shares went over $310 to hit an all-time high. However, the stock is currently hovering around the $192.20 level, down 38% from its high. The stock's 52-week price was $179.15 – $310.16 and its market cap stands at $225.6 billion.
Highlight recent statistics:
"The transaction value of the digital payments market was $5.44 trillion in 2020 and is expected to be worth $11.29 trillion by 2026."
And PayPal is one of the main names in digital payment services. For example, more than 70% of US e-commerce sites have the PayPal button as a payment option.
The platform released third quarter financial data on November 8. During , it had 416 million active accounts with a total payment volume (TPV) of $310 billion. There were 4.9 billion payment transactions, or an average of 44 payment transactions per active account.
Net sales were $6.18 billion, up 13% year over year. Non-GAAP EPS came in at $1.11, up 4%.
The 20% growth in free cash flow of $1.29 billion was impressive. But for the fourth quarter, the outlook was weaker than analyst estimates. Management expects to generate between $6.85 billion and $6.95 billion in net income in the fourth quarter.
Prior to the release of the quarterly results, PYPL stock was about $230. On December 1, it went below $180. Since then, buyers have come in and pushed it to $192.20.
What to expect from PYPL stock
Of the 48 analysts surveyed via Investing.com, PayPal stock has an "outperform" rating.
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Analyst consensus estimates polled by Investing.com.
Chart: Investing.com
Analysts have a median 12-month price target of $271.58 for the stock, representing an increase of more than 41% from current levels. The 12 month price range is currently between $39 and $366.
On the other hand, according to a number of valuation models, such as those that consider P/E, P/B or P/S multiples or DuPont analysis, the average fair value for PYPL stock through InvestingPro is $ 214.38, implying upside potential of 11%.
Fair value courtesy of InvestingPro.
Graph: InvestingPro
Meanwhile, looking at the company's financial health determined by ranking more than 100 factors relative to peers in the information technology sector, we see that PayPal scores 4 in terms of growth and earnings health. out of 5 (top score). Overall performance is rated "good."
The latest P/E, P/B and P/S ratios for PYPL stocks are 45.7x, 10.2x and 9.2x. By comparison, those metrics for peers are 45.7x, 10.2x, and 9.2x. In other words, despite the recent price drop, PYPL stock still looks foamy.
We can also look at similar stats for several other fintech names, including Block (NYSE:), Fiserv (NASDAQ:), Mastercard (NYSE :), Paysafe (NYSE:), SoFi Technologies. (NASDAQ:) and Visa (NYSE:). They are:
These statistics show that valuations in the fast-growing fintech segment vary. Therefore, potential investors should do further due diligence to find the best stocks suitable for their goals.
Finally, those who also pay attention to technical charts may be interested to know that, despite the recent drop in prices, several of PYPL's medium-term indicators are still warning investors.
In the coming weeks, we expect PayPal stocks to potentially trade between $180 and $200, providing a base from which to begin a new leg.
Therefore, investors who are not concerned about short-term fluctuations in PYPL stocks should consider buying them around these levels.
Those who are optimistic about PayPal stocks long-term but believe the short-lived shakiness could continue should use options. For example, they could construct a diagonal debit spread on PYPL stocks using Long-Term Equity Anticipation Securities (LEAPS) options. We've discussed numerous examples before (here and here).
The strategy, also known as "Poor Man's Covered Call" or "Poor Person's Covered Call", includes options. This strategy is not suitable for most retail investors, so they should consider the following discussion for information purposes rather than a trading recommendation. PayPal would currently cost about $19,200 based on Tuesday's intraday price of the stock, a significant investment for many people.
But in this strategy, a trader would first buy a "longer term" call with a lower strike price. At the same time, the trader would sell a "shorter term" call with a higher strike price, creating a long diagonal spread.
In other words, the two call options for the underlying stock (i.e. PYPL in this case) have different strikes and different expiration dates. The trader goes long with one option and short with the other to create a diagonal spread.
In this LEAPS covered call strategy, both the profit potential and the risk are limited. The trader determines the position for a net depreciation (or expense). The net depreciation represents the maximum loss.
Most traders adopting such a strategy would be slightly optimistic about the underlying security – here, PayPal.
Instead of buying 100 PayPal shares, the trader would buy a LEAPS call option, with that LEAPS call acting as a surrogate for holding the PayPal shares.
At the time of writing, the PYPL was $192.20 (Editor's Note: It ended the day at $190.10, but we're sticking to the author's afternoon calculations in this post).
For the first leg of this strategy, the trader could buy a deep in-the-money (ITM) LEAPS call, such as the PYPL Jan 19, 2024, 150 strike call option. This option is currently offered for $65.75 (middle of the current bid and ask spread). In other words, it would cost the trader $6,575 instead of $19,198 to hold this call option which expires in more than two years.
The delta of this option is about 0.80. Delta shows the amount the price of an option is expected to move based on a $1 change in the underlying asset.
In this example, if PayPal stock rises to $193.20, the current option price of $65.75 is expected to rise about 80 cents, based on a delta of 0.80. However, the actual change may be slightly more or less depending on several other factors beyond the scope of this article.
So the delta of an option increases the deeper one goes into the money. Traders would use deep ITM LEAPS strikes because as the delta approaches 1, a LEAPS option's price movements begin to mirror those of the underlying stock. In simple terms, a delta of 0.80 would be the same as owning 80 PYPL shares in this example (as opposed to 100 in a regular covered call).
For the second part of this strategy, the trader sells an out-of-the-money (OTM) short-term call, such as the PYPL Feb 18, 2022, 195 strike call option. The current premium of this option is $11.75. In other words, the options seller would receive $1,175 excluding trading commissions.
There are two expiration dates in the strategy, making it quite difficult to give an exact formula for a trade break-even point. realized when the share price is equal to the strike price of the short call on the expiration date of the short call.
In other words, the trader wants the PYPL stock price to stay as close as possible to the short option's strike price (i.e. $195 here) on expiration (February 18, 2022), without going above it.
In our example, the maximum return would, in theory, be about $1,267 at a price of $195.00 at maturity, excluding trading commissions and fees. We arrived at this value using a profit and loss calculator.
Without the use of such a calculator, we could also arrive at an estimated dollar value. Let's see:
The option seller (i.e. the trader) received $1,175 for the option sold.
Meanwhile, the underlying PYPL share rose from $192.20 to $195. This is a difference of $2.80 for 1 share of PYPL or $280 for 100 shares.
Since the delta of the long LEAPS option is 0.8, the value of the long option will theoretically increase by $280 X 0.8 = $224.0 (however, in practice it could be more or less ).
The total of $1,175 and $224 comes to $1,399. Although it is not the same as $1,267, we can consider it a good estimated value.
Understandably, if our long option's strike price had been different (i.e. not $150.00), the delta would have been different as well. Then we have to use that delta value to arrive at the estimated final profit or loss value.
Therefore, by not investing $19,200 in 100 PYPL shares initially, the trader's potential returns are exploited.
Ideally, the trader hopes that the short call will expire out-of-the-money. Then the trader can sell one call after another until the long LEAPS call ends in about two years.
Finally, we must keep in mind that a diagonal debit spread requires regular position management.
