What happened?

Paypal’s stock price has risen by almost 40% year to date alone. Is this growth stock still worth getting into? Or is it overpriced?

Why is this important?

In general

Growth stocks are one of the best ways to earn high returns. Paypal has been a growth stock for a while, with outstanding increases in value over the past few years. However, growth is not guaranteed, neither in revenue, nor earnings per share, nor in price.

For investors

Paypal is a well known, established company with reputable services. It has delivered rather staggering growth in price for its shareholders and seems to be growing at a healthy rate. Revenues from transactions make up 90% of Paypal’s total revenues. So, it’s quite appealing to see that the number of transactions has increased rather steadily over time.

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Paypal

Growing by 27% in 2017-2018 alone it does seem to have a solid business foundation.

That said, if we delve a little deeper into Paypal’s valuation, we will see that there is a rather big divergence in its recent price vs fundamental performance.

Paypal

What the graph above shows us is just that. Paypal’s revenue growth has slowed to a minimum, recent EPS values have dropped Q/Q, however, the price has soared.

So has it’s Price to Earnings ratio when compared to the drop in revenue growth:

Paypal

An interesting comparison could be made with Facebook, another growth stock which is experiencing a slowdown in revenues:

Paypal

As we can see, not only has Facebook’s revenue growth been stronger than Paypal’s throughout the same period, its PE ratio is more than half the size of Paypal’s. In addition, Facebook’s PE ratio has been deteriorating with its lower revenue growth. In contrast, Paypal’s PE ratio has soared to new highs with deteriorating revenue growth.

As insightful as that can be, recent acquisitions such as Venmo are bound to deliver additional fast-growing revenue and eventually earnings to the bottom line. However, with everything that has happened the analyst predictions for the company’s revenue growth are as follows:

With this in mind, does a company growing at 15-18% a year in revenues justify the current valuation? Given the quick comparison with Facebook, probably not.

For traders

Paypal, up by 40% year to date, is currently trading at 2.5% below the all-time high of around $120. It has formed a long-lasting channel, with the nearest resistance at $117.5 and nearest support at $113.5. RSI is currently in the normal range, at 60.

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