The Bottom Is In For Paypal

Paypal Is The Most Downgraded Stock In Q1 

Paypal NASDAQ: PYPL is the most downgraded stock of the FQ4 reporting and calendar Q1 season. The company received 40 downgrades which is saying something because that’s all the analysts rating the stock. The takeaway is that, while all 40 of the analysis downgraded the stock the Marketbeat.com consensus rating is still a Buy if a weak Buy with a price target more than 75% above the recent action. The reason is that Paypal issued a softer than expected guidance and a slight change in its direction that will ultimately drive longer-term growth. In our view, what we’ve just witnessed in Paypal stock is a re-evaluation and price-reset in what is otherwise a very desirable stock. 

BTIG analyst Mark Palmer said this when he cut the stock rating to Neutral from Buy and removed his $270 price target …  "As such, we now view PYPL as a 'show me' story as the company would need to demonstrate that it is still capable of sustaining revenue growth north of 20% on a normalized basis before we would be comfortable assigning it the kind of premium multiple that would indicate significant upside from current trading levels," 

Institutional Activity Heats Up In Wake Of Guidance 

The Paypal guidance shook up the market and sparked a sell-off in shares that have been leveraged by the institutions. Institutional activity picked up noticeably in the quarter and smacks of rotation but is overwhelmingly bullish. Total activity in Q1 is worth about $12.09 billion or about 9% of the market cap with shares at $115 with the bulk of the activity buying. The buying, net of selling, is worth about 0.7% of the market cap and puts total institutional ownership at 78.4%. If this trend continues the bottom in Paypal is assured but price action may move sideways until the analyst's reshuffling is over. 

Looking at Paypal from an industry perspective, online payments and payment gateways are expected to grow at a 15% CAGR through 2027. This growth is supported by evolving methodology, eCommerce, increasing connectivity, government action, increasing use of mobile, and new technologies that have yet to emerge. In that regard, Paypal is among the top three providers of gateway technology and is well-positioned to capture organic as well as acquisitional growth over the next 5 years. 

Paypal’s growth will also be supported by its shift to a more supportive role for its merchants. The company is aiming to support small and medium-sized businesses in all aspects of their eCommerce needs and recently acquired Israeli-based Cymbio as part of that plan. Cymbio is an eCommerce drop-ship automation platform that helps businesses turn inventory into deliveries once sales are made. 

The Technical Outlook: Paypal’s COVID-Bump Is Over 

The charts of Paypal are a little scary considering the size of both the COVID-Bump and the correction but one thing is clear: the COVID-bump is over. In our opinion, that is good news because now the market can trade on a more realistic view of the market and that view is expansionary. Now that all the analysts have put in their two cents it looks like a bottom is forming near the $100 level. This outlook is bolstered by the indicators which are both showing divergences that are indicative of support at these levels. At worst, we are expecting to see Paypal move sideways at this level until some better news comes out. At best, we are expecting to see Paypal begin moving higher before the middle of the year and possibly reclaim the $200 level by the end of the year.