Back in March 2020, when lockdowns began and businesses were shut down, investors lost confidence in everything, even online payment systems such as PayPal
NASDAQ: PYPL,
Square NYSE: SQ and
Shift4 NYSE: FOUR.
Analysts and investors initially expected economic devastation, not anticipating the rise in online businesses and others that fit nicely with the stay-home theme.
Digital payment platform PayPal has been rallying on increased consumer spending. The company recently said U.S. customers can pay with cryptocurrency, including bitcoin and ether, to other currencies at checkout.
The stock is forming a cup-shaped consolidation below its February 16 high of $309.14. Shares closed Tuesday at $275.43, up $6.40, or 2.38%.
The company reports first-quarter results on May 5, with analysts expecting earnings per share of $0.72 on revenue of $5.74 billion, both up from the year-ago quarter.
The company has a history of beating estimates going back to 2017, so it wouldn’t necessarily be a shock to see that happen again.
Trading volume has been muted during the consolidation, which is both typical and desirable. In particular, when selling stabilizes, it’s often a precursor to further gains. A better-than-expected earnings report may be the catalyst for a fresh rally.
The stock’s consolidation comes at the same time that the tech- and growth-heavy Nasdaq Composite is correcting. About three-fourths of stocks trend in the same direction as the broader market, so using the Nasdaq as a proxy for the broader market of growth names, PayPal’s correction fits right in.
With earnings coming up in a few weeks, investors would be wise to avoid a new purchase until that report comes in. It’s not unusual to see a stock correct after earnings, even if it begins a new rally shortly afterward, as investors digest the results.
Square, which went public in 2015, is involved with many facets of the broad market for financial transactions. It offers payment services for small businesses, as well as peer-to-peer transactions, as well as helping sellers manage their taxes.
Its Cash App is a broad financial management product, aimed at consumers. Analysts see this as a big growth engine, but the company offers a full suite of financial transaction solutions for businesses and individuals.
The company reports its first quarter on May 6, with analysts eyeing earnings per share of $0.16 on revenue of $3.28 billion. Revenue growth accelerated over the past four quarters, while earnings bounced back at double-digit rates after slowing in the first two quarters of 2020.
The stock is up 21.85% year-to-date and 347.90% over 12 months. It closed Tuesday at $273.10, up $7.90 or 2.38%.
Many growth stocks have high price-to-earnings ratios, especially relative to levels traditionally associated with value stocks. Square’s P/E ratio of 433 may sound alarming to some, and investors would be wise to consider whether the stock is already priced to perfection.
However, the strong growth case for the company, as the adoption of digital payments accelerates globally, is among reasons to look to this company’s future potential, rather than view it as overvalued.
As with PayPal, it’s likely a good idea to wait for the upcoming earnings report before diving in.
Shift4 is less well known than PayPal or Square, but it’s another digital payment company that’s been on a tear. This stock went public in June 2020, just in time to capture the pandemic-driven gains in online purchases.
The company operates a payment processing and transaction management solution for a number of industries, including retail, hospitality, e-commerce, gaming and others.
Last month, the company announced a $72-million acquisition of VenueNext, a provider of point-of-sale and mobile payment services, as well as customer loyalty programs.
Shift4 tends to have some volatile weekly trading ranges, which may become compressed as the stock develops a longer trading history. The stock is working on its eleventh month as a public company; it’s notched gains in nine of those months.
The company reports its first quarter on May 6, with analysts eyeing a loss of $0.08 per share on revenue of $227.99 million. That would be a more narrow loss from a year ago, and an increase in revenue.
Shares closed Tuesday at $98, down $2.39 or 2.38%. It’s trading well above key moving averages. While it’s prudent to wait for earnings at this point, investors may also want to see a true consolidation form before jumping in. The stock repeatedly found support near its 50-day moving average for several months, but may be overdue for a true consolidation before taking off again.
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