Are PayPal Shares too Expensive at Current Prices?

Paypal Holdings (PYPL) shares have made substantial gains during the last few months. After closing at $309.14 in mid-February, the stock has dropped by more than 26%, eventually closing at $226.09. However, February’s price was a new all-time high, so it seems that the last year’s stock market crash did not have much of an effect on the company shares, as the price for Paypal stocks has been doubled since March 2020.

One of the main drivers of this uptrend is the company’s improving financial performance. Due to the outbreak of the COVID-19 pandemic, followed by lockdowns and travel restrictions, many companies lost significant portions of their revenues and profits. As a result, investors lost confidence in those firms, and correspondingly, their share prices dropped dramatically.

However, it has to be mentioned that both PYPL stock price and the overall company records were indeed an exception to this dynamic. According to the first-quarter report, the company has added 20.2 million new accounts, including 10.2 million new ones as a result of the acquisition of Honey, for which the firm has paid $3.6 billion in cash. As a result of this change, the total number of active accounts has reached 325 million, 17% higher than during the first three months of 2019, when this number stood at 277 million. At the moment, active accounts have exceeded 377 million at Paypal.

This tendency for growth translated to higher total payment volume, which has increased by 19%, rising from $161 billion a year ago to $191 billion. The firm also achieved a 13% increase in its revenues, which has risen from $4.13 billion back in 2019 to $4.62 billion during the first quarter of 2020. Since the company weathered the storm of the COVID-19 outbreak so well, PayPal stock forecast claims to be well-positioned to increase its earnings in the years to come.

As the official quarterly report mentions, due to recent successes, the company management has returned $800 million to its shareholders by repurchasing 7.5 million shares of common stock. PayPal yet to pay any dividends. Yet, the basic law of supply and demand suggests that when a company purchases its own stock, it reduces the total number of shares in circulation and consequently, makes each of them more valuable. As a result, each shareholder owns a larger portion of the company and is entitled to a greater share of its earnings.

Recent Share Price Performance of PayPal Stock

source: NASDAQ: PYPL

As we can see from the chart above, the PayPal stock price has gone through 4 stages. By late June 2020, the stock was trading close to the $168 level. During the next 3 months, the stock was in a slowly moving upward trend, eventually hitting $210 by the first half of September. This was followed by a slight depreciation during the following months dropping as low as $179 in November, until reaching a peak of 304.79 on the 12th of February 2021.

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There was the point where the second outbreak of the COVID-19 pandemic in summer started to have a major effect on the stock market, leading to a sharp correction, which lasted until the last quarter of the year. As a result of this process, the PayPal share price also experienced significant volatility in terms of losing and gaining around $40 of value per stock in short periods of time.

However, this volatility turned out to be very short-lived. The stock was quick to recover from the ambiguity. In fact, by the beginning of November 2020, the stock erased all of its recent losses and began to steadily increase in price. Since then the uptrend continued without any major disruption and during the middle of February 2021, the stock has already surpassed an all-time high $309 level, making the stock one of the best performers of S&P 100 during the first last quarters of 2020 and beginning of 2021. If you would like to benefit from the upcoming fluctuations in PYPL’s stock price, you can trade on cash CFDs with one of the leading brokers – XM.

Current Valuations of PayPal Shares

It goes without saying that such steady appreciation is impressive for any stock, especially when this move comes during the economic downturn. However, this raises the question: have PayPal shares become too expensive?

In order to come up with an accurate answer, we need to take a look at some of the indicators. Firstly, as CNBC suggests, the Earnings per Share (EPS) indicator of the company currently stands at $3.54. This means that the Price to Earnings (P/E) ratio of the stock is near 67.53. This makes it very clear that despite its growing earnings and share buybacks, the PYPL stock is somewhat overvalued.  If we compare the P/E of Paypal to competitor firms, such as Google Pay owned by Alphabet (just 23.6), it is obvious that the recent surge has made the company’s overvaluation even more extreme.

It is likely that at some point, the PYPL share price might face some sharp correction when the market finally decides to address this imbalance. However, it is very difficult to predict when this turn might take place. It can so happen that some disappointing quarterly reports might become a catalyst for the move, or alternatively, the stock might fall a victim to a general bear market. Furthermore, only recently, the company has announced that it is planning to purchase Curv, an Israeli cloud-based infrastructure provider for digital asset security and the statement has put a lot of pressure on the stock price, eventually causing a downfall of 20%.

Currently, one thing is quite clear. This stock can not be a very useful addition to the “growth portfolio” since due to its extreme overvaluation, its upside potential is very limited. Therefore, investing in PayPal stocks at such overpriced levels can be potentially very risky and could easily lead to significant losses.

It is true that the company still manages to expand its earnings with double-digit percentages, however, those profits can not really catch up to the skyrocketing share prices. This is indeed a piece of good news for the current shareholders of PayPal. However, this process made the stock very unaffordable and expensive for new investors. So consequently, they might be better off looking for some decent value investments elsewhere.

PayPal shares are not likely to attract any income investors either since so far the company not paid any dividends and has not announced any intention of doing so in the near future. If at some point, the management decides to share some of its profits with shareholders in this way, the stock might become more attractive in that regard. However, at the moment, when it comes to decent income stocks, there are certainly much better alternatives that incorporate much smaller risks and have more stability in their valuation.

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FAQ on PayPal shares

Is PayPal stock overpriced?

We have heard the question, is PayPal overvalued, quite a few times during the past months as the price of the company’s stocks has been skyrocketing. PayPal’s market value price has been fluctuating a lot throughout the past year, seemingly unaffected by the pandemic-induced crisis on the market. At the moment, the company is generating significant amounts of profit, however, it is not enough to keep up with its price per share. That is well-expressed in their price to earning (P/E) ratio, as well, which is over 67.53, almost three times higher than its competitor’s – Google Pay’s indicator of 23.6. This should be an alarming signal for anyone who is planning to purchase the stock of the company at its current price, as according to the PYPL stock forecast the market will regulate the overvaluation of Paypal in foreseeable future.

Is PayPal stock a good buy now?

Paypal’s stock price has experienced its all-time high record of 309.14 USD per stock in the middle of February 2021 and has since dropped by more than 20%, currently standing at 226.09 USD. The downfall is considered to be caused by the recent announcement by the ownership of Paypal regarding its plans to buy the new cloud-based infrastructure provider for digital asset security based in Israel under the brand name of Curv, with a deal estimated to be around 200 million US dollars. Assuming that the PayPal stock price today is still highly overvalued with a P/E of around 67.53, it is not a good idea to purchase the stock, as further declines in the price are to be expected in the near future.

Who is PayPal’s biggest competitor?

Depending on the regions, PayPal has a number of large competitors worldwide with the strongest among them being Google Wallet. Google Pay is one of the dominant players in the Unified Payments Interface (UPI) market, with over 150 million monthly active users. However, the number of active accounts at Paypal is twice as much, accounting for 300 million currently. However, if we consider Apple Pay, Android Pay, and Google Pay altogether they would account for more than 400 million users in total, which bypasses PayPal significantly. Other major players on the market are Wepay, 2Checkout, Skrill, Propay, and many newly established payment and transaction platforms that could create quite a few problems for Paypal in the future. At the moment, according to NASDAQ: PYPL is favored on the stock market compared to other platforms, however, it is well known that the stock price for PayPal is highly overvalued and we are expecting to observe the downfall in the upcoming years.