PayPal

A Profit Warning Knocks PayPal Down Like a Rock

PayPal Holdings Inc. (PYPL), one of 2020’s hottest stocks, is trading lower by more than 9% in Thursday’s pre-market after issuing downside profit guidance for the third quarter and full year. The digital payments juggernaut beat Q2 earnings-per share (EPS) estimates by just $0.03, posting a profit of $1.16, while revenue rose 18.6% year-over-year to $6.24 billion, just missing $6.27 billion consensus. Total payment volume during the quarter grew 40%, or 36% on a currency neutral basis.

Pandemic Hangover

The company boasts a 55.7 price-to-earnings ratio (P/E), higher than American Express Co. (AXP) but on par with Visa Inc. (V) and MasterCard Inc. (MA). The weak outlook exposes vulnerability to a pandemic ‘hangover’ that many 2020 beneficiaries have reported in their quarterly results. Simply stated, the rapid transition into digital payments, streaming services, and at-home food delivery yielded a one-time cash influx that’s now reverting to historical performance.

The selloff comes just three business days before PayPal raises rates for many merchant accounts. Originally announced in June, the news triggered a strong rally into July but Q3 and full year profit warnings suggest the company miscalculated and now expects to lose customers. It may also have underestimated the growing number of choices in the digital payment space, heralding an era in which it will need to compete more forcefully for market share.

Wall Street and Technical Outlook

Wall Street has been wildly bullish on PayPal for months, holding like glue to a ‘Buy’ rating now based upon 35 ‘Buy’, 5 ‘Overweight’, 6 ‘Hold’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $250 to a Street-high $375 while the stock is set to open Thursday’s session more than $50 below the median $330 target. A quick uptick into the median price seems unlikely, given weak guidance, because it would require breaking out to a new high.

PayPal posted a phenomenal 219% return in 2020 and continued to book upside into the February 2021 high at 309.14. A decline into March found support in the 220s while the bounce into July mounted the first quarter peak by less than one point ahead of this morning’s selloff. The reversal reinforces resistance above 300 while setting up a test of 50-day moving average support at 285. A breakdown is possible given downside momentum, exposing an unpleasant trip to the March low.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.