After Its Recent Run, Take Profit With PayPal Stock
Even among other Big Tech darlings, shares in PayPal (NASDAQ:PYPL) have performed very well in the past few months. PayPal stock is up more than 37% since November. To some extent, this is due to its exposure to the cryptocurrency megatrend. This may be a reason for concern, with bitcoin (CCC:BTC) and other major cryptos correcting in recent days. We could see another bitcoin bubble burst, much like the one experienced back in 2018.
That being said, bitcoin price movements may be a non-factor here. Last year, PYPL’s rival, Square (NYSE:SQ), bought a $50 million block of bitcoins for investment purposes. However, PayPal has not yet made a similar move.
Also, the bull case doesn’t hinge completely on its crypto catalyst. The company’s exposure to the continued digitalization of financials remains the primary bullish factor for the company.
There’s no doubt the company will continue to gain ground in the financial services sector. Yet, that doesn’t guarantee its stock, which trades for around $247 per share, will continue to surge higher in the near term. Much less, hit a recently touted price target of $300 per share.
Why? So far, valuations haven’t split hairs over this stock’s frothy forward multiple. But, this could change in the coming months. Shares have plenty of room to fall if markets correct.
So, after its incredible run, what’s the play here? Take the opportunity to cash out, as shares remain near all-time highs.
Catalysts for PayPal Stock Are Fully Priced In
I can see why investors remain heavily enthusiastic about this stock. On the right side of trends, the company has a good shot of living up to its current sky-high expectations. Regarding crypto (the recent correction notwithstanding), the payments platform could find tremendous opportunity here.
In fact, even with the stock’s record run as of late, one analyst has argued its crpyto tailwinds aren’t yet fully priced in to PayPal stock. I’m talking about BTIG analyst Mark Palmer, who recently upgraded shares to “buy,” giving the stock a $300 price target. With the platform’s massive user base now able to trade crypto, and soon to be able to transfer crypto via its Venmo peer-to-peer transaction platform, the company could profit as a middleman in this fast-growing alternative asset.
Besides potential upside from crypto, the company’s longstanding catalyst (the digitalization of financial services) remains in motion as well. Earlier this month, InvestorPlace’s Faizan Farooque broke down how the company’s upending of the “old school” financial services sector paves the way for continued growth in the coming year.
The problem? Both of these factors are more than reflected in the current price of PayPal stock. So far, valuation concerns have done little to scare off investors. But that could change going forward.
This Richly Priced Stock Could Tumble If Markets Correct
Trading for a forward price-to-earnings (P/E) ratio of 56.18, PayPal stock isn’t cheap by any means. This by itself isn’t cause for concern. Depending on a company’s expected growth, a rich premium may be warranted. But, taking a closer look, it’s tough to justify its current forward multiple.
As Seeking Alpha discussed in late December, PayPal’s valuation has gotten way ahead of its fundamentals. Shares appear overvalued relative to both its projected growth and its main peers.
Granted, valuation continues to take a backseat to growth, or at least the perception of growth, in today’s stock market. But, this could change in the months ahead. With investors rotating out of Big Tech winners, and into other opportunities, we could see downward pressure on shares going forward.
Even worse is the risk that stocks in general, and tech stocks in particular, are just about ready to correct. Given PayPal stock today trades far above its historical P/E ratio, shares could fall significantly if markets experience a major sell-off.
Consider Selling Into Today’s Strength
I may believe PayPal is more likely to take a big tumble rather than rally further in the short term. But, don’t take this to mean it’s wise to go short this stock as a bet on a possible stock market correction.
Timing the market is much harder than it looks. And, typically, not a winning strategy. Predicting when (or if) a correction is around the corner is even more challenging. The runaway bull market in tech stocks may look like its running out of gas. But there’s still a case to be made this sector will continue to outperform.
Nevertheless, for those who bought in at lower prices, a bird in one hand may be worth two in the bush. Given its frothy valuation, potential losses may vastly exceed potential gains through the rest of the year.
So, what’s the best move? Sell into strength with PayPal stock.
On the date of publication, Thomas Niel held a long position in bitcoin.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.