PayPal Holdings Inc. is a fintech platform firm enabling both digital and mobile payments for both consumers and merchants (a two-sided model) around the world. PayPal’s broad-based objective is “to enable consumers and merchants to manage and move their money anywhere in the world, anytime, on any platform and through any device.” PayPal was spun out of eBay in July 2015 and its core product is a two-sided network where both merchants and consumers have PayPal accounts. The company’s primary source of revenue (90%+ of net revenues) is derived from charging fees for completing payment transactions, typically based on volume of activity.
Among several attractive financial fundamentals, PayPal's FY2023 estimated P/E Ratio is 12.5, which is very attractive based on their ongoing growth potential and the discounted P/E relative to both the S&P 500 and also PayPal's historical valuation. Management's current focus on improving margins primarily through expense reductions and also substantial stock buybacks with their ample free cash flow bodes well for further potential earnings improvements. PayPal appears in two of my stock screeners: (1) GARP (Growth at a Reasonable Price); and (2) Future 5-Year PEG Ratios. In addition, forty-five analysts now covering PayPal have an average target price of $85.70 (a +35.6% upside potential from today's stock purchase price).
Investor sentiment on Paypal's stock price continues to be negative (-12.8%, -37.8%, and -68.2% for the prior 3-month, 1-year, and 3-year periods respectively). But after listening to their Q2 2023 conference call, I believe they are now likely near an inflection point -- where, as stated by their CEO: "we're clearly seeing a lot of headwinds begin to shift toward tailwinds". PayPal is a trusted brand, and two of their notable competitive advantages are: (1) Their two-sided model provides information on both sides (both merchants and customers) of each transaction which gives PayPal a meaningful edge in combating fraud; and (2) E-commerce payment transactions growth is accelerating worldwide, and PayPal is especially attractive to merchants since PayPal customers are significantly less likely to abandon their cart.
As detailed below, a potential outcome for this PayPal investment is +1.1% absolute return-on-investment for the next 14 days (equivalent to +28.3% annualized-return-on-investment) if the stock closes above the $59.00 strike price on the August 25th, 2023 options expiration date.
PayPal Holdings Inc. (PYPL) -- New Covered Calls Position
8/11/2023 Bought 400 shares of PayPal stock @ $61.72 per share and simultaneously Sold 4 PYPL August 25, 2023 $59.00 Call options @ $3.36 per share.
A possible overall performance result (including commissions) would be as follows:
Covered Calls Net Investment: $23,346.68
= ($61.72 - $3.36) * 400 shares + $2.68 commission
Net Profit Components:
(a) Options Income: +$1,341.32
= ($3.36 * 400 shares) - $2.68 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If PYPL stock is above the $59.00 strike price at the August 25th expiration): -$1,088.00
= ($59.00 -$61.72) * 400 shares
Potential Total Net Profit (If in-the-money and therefore closed out by assignment at the options expiration date): +$253.68
= (+$1,341.68 options income +$0.00 dividend income -$1,088.00 capital appreciation)
Potential Absolute Return-on-Investment: +1.1%
= +$253.68/$23,346.68
Potential Equivalent Annualized-Return-on-Investment: +28.3%
= (+$253.68/$23,346.68) * (365/14 days)
