Payment stocks have fallen out of favor, and PayPal stock is no exception. Since mid-October, the fintech giant’s shares have plunged nearly 30%, from around $270 per share to around $190 per share.
Why has sentiment shifted so much for PayPal shares? Blame a variety of reasons. But what’s more important is whether this reaction is justified. Or, if investors have overreacted to what amounts to near-term hiccups.
Figuring out which view is correct will determine whether this is a “buy the dip” opportunity or a warning sign to stay away. Let’s dive in, and explore both arguments.
3 reasons why investors are hitting the ‘sell’ button on PYPL stock
There are a few reasons why sentiment has gone from positive to negative with PayPal shares. First is the fact payment stocks in general have struggled lately, due mostly to renewed COVID-19 fears.
Second is uncertainty over the company’s merger and acquisition (M&A) plans, on the heels of Square’s (SQ)purchase of Australia-based Afterpay in a $29 billion transaction.
Third, PYPL stock has suffered due to the company’s underwhelming guidance update released in early November. In response to management projecting slower-than-expected sales growth in the near-term, the sell-side community slashed price targets for the stock.
Time to buy or time to sell?
It’s clear exactly why investors have bailed out of PayPal stock. What remains unclear? Whether it’s a sign to buy, or a sign to sell.
To some, making a new 52-week low is a sign of a buying opportunity, ahead of it bouncing back as it comes back into favor. If COVID-19 fears (latest variant notwithstanding) clear up again, and consumer spending remains strong, sentiment for payment stocks could improve.
To others, it’s not so much a “buy the dip” as it is a “catch a falling knife” situation. That is, even if the situation with payments stocks improves, other concerns could weigh on it. For example, valuation. Forward P/E ratio (40.7x) is a bit high, relative to 18.9% earnings growth in 2021, and 15.2% earnings growth in 2022 (per analyst consensus).
Bottom line on PayPal
The decision to buy or sell PayPal after its recent drop is not an easy one. There’s merit to the argument that shares are oversold, and that today’s concerns about Covid, the overall economy, and PayPal’s slowing rate of growth are overblown.
There’s also merit to the argument that PYPL stock is still pricey. More indication that it will grow its sales/earnings at a slower rate than previously anticipated could result in further multiple compression.
Investors bullish that payment stocks will come back into favor and that growth stocks will remain strong may want to buy. But investors more conscious about valuation, or who are bearish about the market’s next step, may want to wait until PYPL shows signs of bottoming out.
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