PayPal: Don’t Stay Hanged on Bad Calls (NASDAQ:PYPL)

Investors in PayPal Holdings, Inc. (NASDAQ:PYPL) is likely to assess whether the worst of the price decline since the previous update (pre-earnings) in October is over. I argued that PYPL “is expected to produce a reversal at any given moment.” Even if the issue of “oversold conditions” arises, PYPL buyers still have a lot to prove to escape their bearish bias.

Therefore, PYPL has outperformed the S&P 500 (SPX) (SPY) since the previous update as deep buyers attempted to hold on to the October lows. However, PYPL has been facing strong resistance at the $66 level for the past three weeks, suggesting that the buying momentum may lose its upside if the pace of profit-taking picks up.

As a result, we believe it is timely for holders to reassess whether they should reallocate their exposure in PYPL given the recent recovery, or wait until CEO Alex Chriss implements lasting action. recovery. However, it is important to note that PayPal faces significant competition in the market. In the brand space, Apple’s (AAPL) is focused on increasing its share in the financial services sector. Despite recent setbacks exit Partnership with Goldman Sachs (GS), the Cupertino company has a large consumer ecosystem through its iOS walled garden. As a result, the headwinds against PayPal are likely to deepen rather than ease.

PayPal also faces stiff competition from peers in the non-branded space, including Stripe (privately held) and Adyen (OTCPK:ADYEY). Stripe returned to profitable growth, posting 35% year-over-year revenue growth in the third quarter. The reported valuation of $50 billion surpasses Adyen’s most recent market cap of $40.2 billion. ADYEY’s significant recovery since its early November lows (up more than 100% to this week’s highs) suggests the market is keen on pushing ADYEY higher than PYPL. As a result, ADYEY is assigned an “A-” Growth Grade and a “B+” Profitability Grade, indicating that the market remains focused on growth and profitability. PYPL last traded with a market capitalization of about $68 billion, well ahead of its major unbranded competitors. However, we expect the market to be lukewarm on further re-evaluating PYPL, as Adyen and Stripe appear to have weathered their recent difficulties well.

Additionally, PayPal CEO Alex Chriss is said to be accelerating the transformation of the brand’s strategy through Project Quantum Leap. The initiative is designed to implement “significant changes to strengthen the company’s competitive position.” As a result, it can be a ‘strategic shift focused on innovation and competitiveness.’ information It emphasized that the project aims to “a comprehensive overhaul aimed at improving PayPal’s digital wallet and online payments.” As a result, this could represent a new offensive in PayPal’s attempts to defend its market share from encroachments from Apple and other competitors. But could this mean PayPal needs to invest more aggressively to fuel growth?

Chriss emphasized during PayPal’s Q3 or Q3 earnings call that PayPal’s high cost base “impacts agility.” As a result, the company must remain focused on “managing and potentially reducing costs to improve operating leverage.” PayPal is therefore “improving operating speed and efficiency,” with the goal of achieving improved operating leverage as PayPal’s growth slows. That said, I think PayPal is likely between a rock and a hard place. It must defend Apple’s growing influence and ambitions in the branded space, while also gaining market share against fierce competition from Adyen and Stripe in the non-branded space.

As a result, I believe that’s reflected in the market’s pricing, which suggests that PYPL’s best years may be over. That said, investors shouldn’t wake up and hope that PayPal can return to its pre-COVID-19 high-growth days. Assigning a bearish rating to PYPL at current levels would likely be overly pessimistic, but we wouldn’t want to assign a bullish rating either.

I exited PYPL in mid-October at around $57.75 and redistributed my funds to participate in other opportunities. I’m glad that reallocation has allowed me to significantly outperform PYPL at the level I’ve been selling at. So PYPL closed just +6.3% above where I sold two and a half months ago. Among those that repositioned within a month of the sale were Lowe’s (LOW), Blackstone (BX), and ASML (ASML). Since then, all three positions have recorded solid gains. LOW closed +14.7%, BX closed +35.6%, and ASML closed +31.4% (all of these trades have “receipts” as shown in the trade notifications in my service). All are considered high-quality stocks, like PYPL, with sustainable moats.

Click to enlarge.

Morningstar Ratings and Economic Moat Ratings.

Why hold on to stocks that are still in a medium- to long-term downtrend when much more attractive opportunities present themselves? As you can see above, PYPL appears to be “cheap” compared to its peers and has likely reached peak pessimism. But for the discerning investor, there is a much better opportunity. Capital is competitive and fungible. Yes? As investors, we must always remain good capital allocators and not continue to hold on to underperforming currencies when it is time to fold.

Rating: Maintain Hold.

IMPORTANT NOTE: Investors should exercise due diligence and be careful not to rely on information provided as financial advice. Always think independently. Please note that, unless otherwise stated, ratings are not intended to establish specific entry/exit times at the time of writing.

I’d like to hear from you

Do you have any constructive comments to improve our paper? Have you noticed a critical gap in our perspective? Did you see something important that we didn’t see? Do you agree or disagree? Please leave your comments below to help everyone in our community learn better!

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.