PayPal stock forms a rare pattern, pointing to more upside

PayPal (NASDAQ: PYPL) stock price has gone parabolic, rising for six consecutive days and reaching its highest point since August 2023. It has jumped by over 43% from its lowest point in December.

PayPal and Adyen partnership

The ongoing PayPal share price surge is happening after the company extended its partnership with Adyen, one of the biggest fintech companies in the world. 

The deal means that Adyen, which is used by companies like Amazon, Etsy, Spotify, and Zalando, will offer PayPal’s Fastlane solution to enable fast checkout.

Fastlane is a new solution that lets costumers check out easily when shopping in retail and other online platforms.

It is an important solution that PayPal hopes will help it grow its business at a time when its growth has stalled. 

Recent earnings download

PayPal stock price rose sharply when the company published the recent financial results in July. 

The results showed that the era’s of PayPal’s double-digit growth has ended. Its revenue rose by 8% in the last quarter to $7.9 billion while its total transaction volume jumped by 11% to over $416 billion. It handled over 6.6 billion transactions during the quarter. 

Most importantly, PayPal continued to see weaker active customers in its platform. Its active accounts fell by 0.4% to 429 million. It has been shedding active customers in the past few years after the figure peaked at over 435 million during the pandemic.

On a positive side, PayPal grew its margins in Q2, with the operating margin figure coming in at 16.8%, higher than the 15.5% it made in the same period in 2023. Its quarterly profit jumped to over $1.12 billion.

PayPal expects that its revenue will grow by mid-single-digit in the third quarter while its earnings per share will be between 96 and 98 cents. These numbers mean that PayPal cannot be considered a growth stock as it was in the past few years. 

Most investors have avoided PayPal primarily because its revenue growth has slowed recently and that competition, especially in its unbranded business has risen. Its unbranded business is mostly made up of the Braintree business that lets companies accept payments.

This business is seeing more competition from the likes of Apple, Google, and Buy Now Pay Later (BNPL) platforms like Affirm, AfterPay, and Klarna. It is also facing strong competition from companies like Stripe, Square, Adyen, and Amazon Pay. 

Additionally, its money transfer business is still seeing elevated competition from firms like Remitly and Wise. 

Read more: 3 reasons why PayPal stock is a smart investment now

PayPal is undervalued vs peers

PayPal’s recent surge has pushed its market cap to over $71 billion, which is still lower than its all-time high of over $300 billion.

A look at its valuation metrics shows that it is not a highly overvalued company. It has a forward PE  ratio of 18.2 and a price-to-earnings-to-growth (PEG) of 1.14. In contrast, Block, formerly known as Square, has a forward P/E ratio of 35. 

Similarly, Shift4 Payments has a forward multiple of 29 while companies like Visa, Mastercard, and Fiserve have a multiple of over 25. 

PayPal is also cheaper than the broader S&P 500 index, which has a forward P/E ratio of 21 while the Dow Jones has a multiple of almost 20. This cheaper valuation can be justified since the company’s growth has stalled. 

Looking at PayPal’s balance sheet, we see that it has one of the best balance sheets in the financial services industry. It has over $7.7 billion in cash and equivalents and over $5.5 billion in short-term investments rose to $5.9 billion. 

Its long-term debt is over $9.9 billion, meaning that the company has ample resources to continue buying back its stock. In the last quarter, the company spent over $1.5 billion in share repurchases, reducing the outstanding shares by 24 million shares. It has spent over $5 billion in the trailing twelve months buying back over 82 million shares.

PayPal stock price analysis

The daily chart shows that the PYPL share price formed a double-bottom pattern at $57. In technical analysis, this is one of the most popular bullish patterns in the market. 

The stock has also flipped the important resistance at $70.50 into a support. This was a crucial level since it was the highest point on April 30th. It was also the upper side of the green rising wedge chart pattern.

Additionally, the accumulation and distribution (A/D) indicator has pointed upward, meaning that investors are accumulating the stock. 

Most importantly, the stock has formed a golden cross pattern as the 50-day and 200-day moving averages have made a bullish crossover. This rare pattern often leads to more upside, especially when it is backed by volume. 

Therefore, the stock will likely continue rising as buyers target the next key resistance point at $76.54, its highest point in July last year.