It pays to read beyond the headlines
03/27/18
While PayPal’s (PYPL) price chart may resemble most others in that it shows the stock participated in the February market correction (and rebound), there’s one difference: PYPL’s decline coincided with news that online marketplace eBay (EBAY) had inked an agreement with Dutch firm Adyen, whose clients include Netflix (NFLX) and Uber, to process its payments. PayPal’s current agreement with eBay will expire in 2021, although eBay customers will be able to use PayPal until 2023.1
PayPal (PYPL) 11/29/16–3/26/18. PayPal price chart.

Source: OptionsHouse


PayPal and eBay have been more or less joined at the hip since eBay scooped up the payments processor in 2002, not long after PayPal first went public. It then spun off PayPal in July 2015, and PYPL stock has responded by gaining more than 110% as of yesterday.

The following chart shows the eBay announcement came just as PayPal was releasing its Q4 earnings on January 31, maintaining an unbroken streak of beating or meeting earnings and revenue estimates dating back to October 2015. The reality that PYPL didn’t decline more during the broad market’s correction in February is telling, as is its strong rebound and the fact that so many analysts and market watchers have pointed out the company is well-positioned to flourish post-eBay.

PayPal (PYPL) 10/12/17–3/26/18. Recent PayPal uptrend

Source: OptionsHouse


Why the optimism? Perhaps because, contrary to what many people may think, PayPal doesn’t depend on eBay for the majority of its revenues: eBay accounted for a little less than 10% of PayPal sales in Q4 20172—a figure that William Blair analysts expect to decline to around 6% when PayPal’s agreement with eBay runs its course in 2021.So, we have a price correction that appears to be at least partially inspired by a story that isn’t necessarily a story.

And with China and trade wars so much on traders’ minds these days, it’s interesting that the Middle Kingdom recently announced it would open its doors to foreign payment-processing companies. It’s not a layup by any means, but PayPal has already hooked up with Baidu (BIDU) and Alibaba (BABA),giving it a potentially strong toehold in what will no doubt be a competitive market.

After rebounding off its February low, PYPL’s most recent pullback (part of the market’s trade-war contraction) has put the stock around 10% below the average analyst target around $86. On March 15, Nomura/Instinet raised its target to $97, citing the ability of PYPL’s expanding margins to “overwhelm” the eBay story.5

And as recently as last week, PayPal’s 10-day call/put ratio (the volume of call options vs. the volume of put options) was 4.85, which was higher than 94% of all other stocks.6

PYPL is still well above the near-term uptrend represented by the line connecting the December and February swing lows; if trade-war inspired volatility and negativity continue to shake the markets in the near future, PYPL could certainly pull back to this line without transitioning into a downtrend.

Home is where the price action is: When the market was falling out of bed last week, home furnishings retailer RH (RH), formerly known as Restoration Hardware, was quietly gaining ground and looking like it wanted to turn its most-of-March consolidation into a round-ish swing low. RH will release earnings today after the close.

RH (RH) 9/26/17 – 3/26/18. Restoration Hardware Price chart

OptionsHouse


 

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1 Bloomberg.com. EBay Rises to Record High on Shift to Adyen; PayPal Tumbles. 1/31/18.

2 Seeking Alpha. Why eBay Dropping PayPal Is Overblown. 2/8/18.

3 US News & World Report. PayPal Will Be Just Fine Without eBay. 2/23/18.

4 Investor’s Business Daily. PayPal Vs. Tencent? China To Open Payments Market To Foreign Firms. 3/21/18.

5 Forbes. PayPal Market Cap Set To Surpass Goldman Sachs'. 3/20/18.

6 StreetInsider. PayPal (PYPL) PT Raised to $97 at Nomura/Instinet; 'Expanding Margin Profile to Overwhelm EBAY Headwinds'. 3/15/18.