Company Background

Throughout the last 15 years PayPal has established itself as one of the largest online payment solutions providers on the back of its strong product portfolio and two-sided platform that enables it to offer smooth and secure transaction facility to both customers and merchants. PayPal is the largest “bank” in the world with over 305 million active accounts. The company operates as a payment processor for online vendors, auction sites, and many other commercial users, for which it charges a fee in exchange for benefits such as one-click transactions and password memory. PayPal is benefiting from robust growth in total payments volume owing to increasing net new active accounts. Further, strengthening customer engagement on the company’s platform has been a major positive.

Current Position – Financial Performance & Future Growth prospects

PayPal has a remarkably strong brand identity and recognition all around the world as PayPal’s safety and simplicity of transactions and the fact that it’s both brand and technology pioneer have allowed the company to establish itself as the go-to place for transactions online. PayPal recently announced that users would be able to buy, sell, and hold bitcoin in their Paypal accounts. But this wasn’t the biggest news. PayPal also said that it plans to eventually make bitcoin and other cryptocurrencies usable as a payment method for purchases through PayPal’s 26 million merchants.

While some small businesses were devastated as a result of the COVID-19 pandemic, other small and mid-sized companies that were fully on board with the digital revolution were able to continue making sales while stores were closed. PayPal was a force in processing payments for online businesses while while their on-site operations were closed. Additionally, PayPal also saw a significant increase in its peer-to-peer payments category. When looking at the numbers we could see that total payment volume increased 36% during the third quarter – the highest increase in the company’s history. Furthermore, in October, already into the fourth quarter, PayPal had its highest-volume day ever. Transactions also grew with 30% up to $4 billion – the most transactions ever.

One of its newest platforms has been the company’s peer-to-peer payment service, Venmo, which in turn is the key catalyst behind the solid growth in its total payment volume (TPV). Venmo is driving the active accounts base of the company with the aid of strong monetization efforts and robust features.

Additionally, the fast adoption of Venmo, thanks to the unique client base that PayPal possesses, has allowed PayPal to present a serious challenge to their up and coming rival Square. Furthermore, the company offers domestic and international person-to-person payment facilities with the help of PayPal and Xoom products.

One Touch, is another key growth catalyst for PayPal’s accelerating mobile volumes as a result of its robust mobile checkout services, and its overall contribution to the merchant and customer base.

With the aid of these robust products, PayPal continues to gain solid traction in the global online payment market. It allows customers to send payments in more than 200 markets globally. It has connections with financial service providers worldwide. Further, the company supports withdrawal of funds from bank accounts in 56 currencies and holding balances in PayPal accounts in 25 currencies. Additionally, transfer of funds supports more than 100 currencies globally.

Additionally, this San Jose, CA-based company is gaining from strategic acquisitions including Hyperwallet, Braintree and iZettle that are helping it in delivering better payment experience.

Furthermore, PayPal’s growing banking initiatives remain noteworthy. Instant Transfer to bank allows U.S. customers to transfer money to their bank accounts seamlessly within 30 minutes on the back of the company’s partnership with JPMorgan Chase.

Paypal has consistently grown both its revenue and net income over the years. It nearly doubled its revenue between 2015 and 2019, while net income more than doubled from $1.2 billion to $2.5 billion. In the second quarter of 2020, net revenue jumped by 22% year over year to $5.3 billion, while net income soared by 86% to $1.5 billion.

In 2019, PayPal generated revenues of $17.8 billion. It earns revenues transactions and other value-added services that accounted for 90.6% and 9.4%, respectively, of 2019 revenues. Further, the company’s primary geographical markets which include United States, the U.K. and Other Countries contributed 53%, 10.5% and 36.5%, respectively, to 2019 revenues.

The operational metrics relating to Paypal’s platform have been equally impressive. From Q2 2015 through its latest quarter, it achieved more than sixfold growth in net new active accounts, from 3.4 million to 21.3 million. Over the same period, total payment volumes more than tripled from $69 billion to $222 billion. With many countries encouraging people to switch to online payments to avoid handling physical cash, Paypal is in a great position to add many more new users in the coming years.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 6 months taking the price from the March 23rd lows of around $86 to the highs at $223, thus representing an 159% increase in 7 months. The initial all-time highs were reached in the beginning of September and ever since then, we have seen a volatile roller-coaster price action. An initial correction took the price down with over 18% in less than 2 weeks throughout the first half of September. Then, we saw another sharp appreciation where the price re-tested the all-time highs and the psychological resistance lying there. However, the stock failed to break higher in October and we saw the price dropping sharply in the lead up to the US Presidential Elections. With the elections behind us the stock made another (3rd) attempt to continue its outstanding bull rally, and break the $216 all-time highs at the time, and it initially seemed that it did break out as the stock reached $223 per share in the beginning of December. However, the bullish momentum has been relatively weaker than the one we saw in early September as the RSI has been trading significantly lower. This in turn is a signal that one of the best performing stocks so far this year and a company that we firmly believe in for the long term, might be due for a pullback from the current all time high levels. The actual rejection at $123 now could actually form a Triple Top reversal pattern on the daily chart. Does, this remind you of something? Well, that is exactly what we got from the SPY, NVDA and AMD daily charts – a relatively weaker attempt for a push above the ATH, with two prior strong rejections at the current levels.

The stock is currently sitting at the $219 mark after being rejected by the strong diagonal, horizontal and dynamic trendline all-time high resistance at $223. A downward correction from here could be anticipated as when there are high levels of uncertainty in the market, then all stocks could become vulnerable. Additionally, lets not forget that PYPL’s stock has already appreciated with the staggering 159% from its March lows, thus these current corrective movements, could very well be considered healthy and necessary for the continuation of the uptrend. However, it is of essential importance to note that if the stock fails to resume its uptrend by pushing to a higher high, then this might create a very strong reversal technical pattern called Triple Top Formation. The neckline of this figure would be around the $195 mark and a potential break there could open up the doors for a much larger decline towards the $145 level.

While we believe that the stock market in the US is currently holding a lot of intrinsic risks – COVID-19, presidential elections, the economic recovery etc. – and that we could be in for a sideways and choppy price action in the coming months, we see the winners continuing to win. We remain cautiously bullish on the PYPL’s stock and believe that any profit-taking corrections and potential large price declines would give us a great opportunity to buy the stock at a good discount and hold it for the long term. This, in turn would give us a chance to maximize our profits to the upside, once the stock resumes its strong uptrend. Furthermore, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing that the price might not have enough steam to break the current diagonal trendline resistances that it faces. The exhaustion of the recent up move could be signaling that a potential short-term decline could be just around the corner. Thus, we are not advising our followers to go ahead and start buying the stock right now at its current highs, but to rather wait for a better entry point that we believe will present itself in the coming days and weeks.

Dow Theory 2.0 – Correlation Confirmation

Dow Experts’ approach has always been based on identifying the next great movement in the market by analyzing both the fundamentals, the technicals and all-important factors that have an impact on the price. Furthermore, our cross-correlation analysis allows us to act in the market only if the movement on the chart is confirmed by the other key ETFs and indices that we use in our investing philosophy.

As you know, the Dow Theory 2.0 includes more than 30 correlations between different ETFs and stock market indices, which give us a chance to confirm whether a certain movement in the market is worth taking action for.

Therefore, in order to determine whether PYPL is a good stock to buy with respect to the current levels of the price we have decided to analyze the performance of both the SPY (Select Sector SPDR S&P 500 ETF Trust) and the XLK (Technology Select Sector SPDR Fund). The two ETFs share a very strong and positive 90% 10-year correlation, which would allow us to confirm some of the signals that we are getting with a great deal of certainty. The SPY is the largest, most liquid and most commonly traded ETF out there that invests in the 500 most well-capitalized companies in the US, and by doing so it mimics the performance of the S&P 500 benchmark index. PayPal is the 18th largest holding of SPY with its current 0.81% weight within the ETF, which is understandable as the stock has already more than doubled throughout 2020 and it has far outpaced some of the other SPY holdings. However, this should definitely not be taken as a negative for the stock, but rather as a positive, as the company is considered to be one of the most popular stocks among traders and investors and as a result of that its valuation metrics are not always the driving force behind the price movements on the stock. The stock is also the 6th largest holding of the XLK ETF with its 2.96% weight.

By looking at the daily chart, one could see a very similar movement on the SPY, compared to both the chart of PYPL and XLK. Due to the coronavirus outbreak earlier in the year, the SPY made a 35% correction, dropping from its highs at $339 towards the key support at $221 where it found lots of buying interest, which ultimately led to one of the strongest rebounds in the history of the stock market as the SPY has appreciated with 62% in just 5 months. There has been a lot of speculation and discussion recently on how come the US stock market continues to rally when the US economy is barely trying to survive in the current COVID-19 environment. However, as we know the technical charts reflect the overall fundamental picture and the investors’ sentiment in the market. At the moment, the remarkable and relentless fiscal and monetary support provided by the government and the Fed is acting as a safe net for this highly overbought and overvalued market. The support will continue, but how much longer could the market continue to grow in this environment.

Similarly to PYPL and XLK, the SPY experienced a volatile correction in the first 2 weeks of September that took the price down with around 5-6%. However, the uptrend resumed shortly thereafter. The ETF is currently sitting at the $367 mark after rebounding from the strong dynamic 20 DMA support at $363, which also overlaps with another strong horizontal support positioned at $362. The initial correction back in September was anticipated by us as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 5 months it was more than normal to see a downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the effect of the outcome of the presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we see that the winners would most likely continue to win. The strong rebound that we saw in the first part of October kept us bullish on the SPY ETF at the time but we also believed that any profit-taking corrections should be treated as great opportunities to buy one of the most well diversified ETFs and some of the stocks in it at a good discount. Furthermore, this would in turn give us a chance to maximize our profits to the upside and finish this year in a strong and profitable manner. The month of November was the best month for the US Equity markets since 1987 – the S&P 500 rose 10.75%, the 30-stock Dow Jones Industrial Average gained 11.84% and the Nasdaq Composite rose 11.8% in November. However, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing early signs of exhaustion of the recent upward movement and are signaling that the uptrend might be at risk if some of the key support levels on the chart are broken. Thus, we are not advising our followers to go ahead and start buying the stock orthe ETF right now at its all-time highs, but to rather wait for a better entry point that we believe will present itself in the coming days and weeks.

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 6 months taking the price from the March 17th lows of around $68 to the $127 all-time highs in the beginning of September. Since then, we have seen a 15.6% correction for the XLK in the first part of September, which was quickly recovered in the second part of the month, as the price headed back up strongly. Throughout the month of October, the XLK ETF experienced quite the roller coaster as after a nice bullish run from $110 to $123, the ETF saw its price declining in the 2nd part of the month all the way down to $110, thus establishing a nice trading rage. The month of November on the other hand was the best month for the US Equity markets since 1987 – the S&P 500 rose 10.75%, the 30-stock Dow Jones Industrial Average gained 11.84% and the Nasdaq Composite rose 11.8%.

The ETF is currently sitting at the $126 mark testing the strong psychological and all-time high resistance at $127. The correction back in September was anticipated by us as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 5 months it was more than normal to see a downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the effect of the result of the presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we see that the winners would most likely continue to win. We remain cautiously bullish on the XLK ETF and believe that all these profit-taking corrections are giving us great opportunities to buy the best performing ETF and some of the stocks in it at a good discount, which would in turn give us a chance to maximize our profits to the upside. However, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing exhaustion of the recent upward movement and are signaling that the uptrend might face some headwinds very soon. However, it is important to note the fact that the XLK and the Technology sector as a whole would continue attract a lot of the investors’ attention moving forward, as Technology is everything nowadays and the companies in this space are the ones shaping up our future. This makes us rather cautiously optimistic for the performance of the ETF as even if there is a short-term price decline coming soon, we believe that this ETF will be able to hold its ground better than some of the other ETFs out there.

The daily chart shows that the price is currently testing the key resistance line at $127, which actually matches with the all-time highs for the stock. Considering the fact that the price is currently sitting at this high level and there is plenty of uncertainty in the market at the moment, we are expecting to see a short-term correction taking place in the coming days and weeks. As mentioned above, the technical indicators that we are monitoring closely are also signaling that certain exhaustion currently exists in the market. The fact that all three charts that we’ve analyzed are showing the same exhaustion patterns means that there is a roughly 90% chance for the XLK to move slightly lower in the coming weeks, before it resumes its strong long-term uptrend. If we see the price breaking down below the initial strong support levels at $123 and $119, then we could expect a steeper decline towards the next major horizontal support lines at $110 and $103 where lots of buying pressure is expected to occur, thus sending the price back to the all-time highs. Thus, we are not advising our followers to go ahead and start buying the stock right now at its all-time highs, but to rather wait for a better entry point that we believe will present itself in the coming days and weeks.

Conclusion

In conclusion, after analyzing Paypal’s fundamentals, new products and features, recent financial performance, as well as the technical picture with the recent uprise and the potential profit taking interest building up ahead we wanted to get a further confirmation as to whether PYPL qualifies as a qualitative stock purchase according to the DowExperts. Following the recent strong appreciation for the stock, we looked at 2 ETFs that have a strong positive 10 year correlation in order to put the recent uprise in PYPL’s stock into context. By doing so, we could further test our short-term cautiously bullish and long-term bullish stance for the stock in the right way. Both SPY and XLK confirmed our expectations for an initial short-term weakness before the resumption of the long-term bullish trend for PYPL’s stock. Thus, we will take advantage of the great long-term bullish potential, by opening 1/3 of our overall positioning at the current levels, and will be looking to add more to our PYPL exposure on any additional declines both caused by either intrinsic company weakness or by a broader market sell off.

Our short-term correction targets to the downside are going to be placed at $217 and $180, where we will be looking to further add to our PayPal long position, thus improving our average cost basis on the trade.

As the price starts to reverse back to the upside, we will be interested in collecting our first profits at the $240 mark. Our next profit-taking area is positioned at $255 and $270 respectively, where we will be collecting the majority of our profits.

Sincerely,

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