PayPal Stock May Have Finally Found The Bottom (Technical Analysis)

Summary:

• PayPal appears to be bottoming out from a technical perspective.
• The news that Amazon will no longer accept Venmo for payments is not expected to have a significant negative impact on PayPal.
• The bullish technical set-up, strong expected revenue and earnings growth, and a low valuation equal a rising stock price in 2024.

PayPal (NASDAQ:PYPL) finally appears to be bottoming out from a technical perspective. This is supported by the stock’s attractive valuation and strong expected growth for 2024. The overall outlook for 2024 is positive for the company.

First, I wanted to address some recent news that could be of concern to investors. The announcement that Amazon (AMZN) will no longer accept Venmo for payments is not really a significant negative blow for PayPal. The reason for that is because credit cards are the most used method of payment on Amazon. Amazon will still accept Venmo credit and debit cards. Amazon is just discontinuing the use of the Venmo instant payment option. So, the decision shouldn’t have a material negative impact on PayPal. PayPal has better growth avenues, which I will explain.

With that said, let’s get into the analysis:

PayPal’s Monthly Chart

The main set-up that is noticeable on the monthly chart is the bullish divergence between the recent declining stock price and the rising trend on the MACD and RSI indicators from 2022 through 2023. This set-up typically results in a stock price reversal. Since this is on the monthly chart, the reversal is likely to last for the long term (for at least a year).

The reason why I say it could last a year is because the last large rally lasted from April 2020 to July 2021 as a technical point of reference. Another reason is the company’s growth is expected to be strong in 2024. PayPal’s stock can drive higher in 2024 since it is supported by strong expected revenue and earnings growth. Revenue is expected to grow by 8% to 9% while earnings are expected to grow by 12% to 13% in 2024.

The MACD indicator recently shifted from bearish to bullish as the blue MACD line crossed above the red signal line and the histogram turned green. The RSI indicator increased from an oversold condition in 2022 and crossed above its yellow moving average, which confirms a bullish change in trend. There is also long-term price support around this $50 level, where the stock began to rally back in 2017.

The bullish divergence and the bullish indications on the MACD and RSI indicate that a bottom is likely in for the stock.

The chart above shows the large gap between normalized diluted EPS and the stock price. Stocks tend to correlate well with earnings growth over time. PayPal’s stock was trending well with EPS growth up until 2022 when the stock took a huge hit.

The stock has a lot of catching up to do, which can be fueled by PayPal’s strong expected revenue and earnings growth in 2024 from the low valuation. If PayPal meets/exceeds expectations in 2024, it could be the catalyst to narrow this large gap between EPS and the stock price.

PayPal’s Growth Drivers

The bullish technical set-up can turn into a sustained rally if PayPal’s positive growth expectations for 2024 are achieved. PayPal’s strong expected revenue and earnings growth for 2024 divided among the quarterly earnings reports could be the catalyst to drive the stock higher next year.

One key advantage that PayPal has is that 70% of the U.S. adult population used the service in the past five years. The company is also building on this stat to target additional markets.

Here are some of the strategies that PayPal is implementing to achieve its strong expected growth. PayPal recently launched Venmo Teen Account which targets minors aged 13 to 17. This account comes with a debit card that pre-adult teens can use to gain the responsibility of handling a spending account. This opens up a whole new market for PayPal, which can help the company secure long-term customers at an early age. As these pre-adults get used to the account, they can transition into PayPal’s standard services as they reach adulthood.

The company also incentivized adult customers with a 3% cashback rewards credit card known as the PayPal Cashback Mastercard. Users of this card have been found to make an average of 56 more PayPal purchases in a year as compared to prior purchases before using this card. In the past 12 months, 25 million customers have used this rewards card.

PayPal USD [PYUSD] has been launched by the company as the first regulated stablecoin from a global payments company. This connects Venmo and PayPal systems together to make a more powerful and streamlined peer-to-peer network. PYUSD allows customers to buy, sell, hold, or transfer the currency. PYUSD also enables the purchase of certain cryptocurrencies.

PayPal also launched a solution for small businesses to gain more customers, known as the PayPal Complete Payments Solution. PayPal serves about 35 million merchants, and most of them are small businesses. This solution helps small businesses sell on a global basis while enabling a range of payment options, which includes Venmo and PayPal. The solution also provides package tracking.

The company has demonstrated success in growing market share with its Braintree solution for large businesses. Braintree serves large customers such as Ticketmaster, Uber (UBER), Adobe, Booking.com, and DoorDash (DASH). PayPal processed $450 billion in volume over the past 12 months through Braintree. That’s about 10% of the total global large-enterprise e-commerce market. Braintree can continue to be marketed for ongoing large-volume growth.

These strategies can help PayPal achieve the consensus expected revenue growth of 8% to 9% and EPS growth of 12% to 13% for 2024. PayPal’s strategies can be the catalyst that drives the top and bottom line growth, thus driving the stock higher from the bullish technical set-up.

Valuation Supports Stock Growth

PayPal is only trading at 10.5x expected EPS of $5.60 for 2024. This is lower than Block’s (SQ) forward PE of 23.6x based on expected EPS of $2.93 for 2024. Another peer, Fiserv (FI) has a higher forward PE of 15.4x based on expected EPS of $8.58 for 2024.

PayPal also has the more attractive valuation on a price/cash flow basis. PayPal trades with a forward price/cash flow of 12.5x. Block has a much higher forward price/cash flow of 33x while Fiserv trades a little higher with a forward price/cash flow of 13.7. PayPal’s lower valuation should provide some run room for the stock to have a strong bull run in 2024.

PayPal’s Outlook for 2024

PayPal’s stock is set-up attractively on a technical basis for a long-term strong move higher. The stock’s strong expected growth for 2024 can drive the stock for strong above-average gains from the low valuation. The company’s strategies can drive long-term growth, especially as it secures customers at younger ages. The company’s solutions for small and large businesses may also gain traction in 2024 as the company continues to target these markets.

The main risk for PayPal is increased competition, which can come from its peers Block and Fiserv. Competition can also come from large banks or other companies who can implement similar payment solutions. The good news is that PayPal established itself as a trusted payment solution for individuals and businesses of various sizes. The company can build on its reputation with this brand recognition.

Analysts have a one-year price target of $74 for the stock, which is 26% over the current price. This looks reasonable as it would take the PE to about 13x expected EPS of $5.60 for 2024. The stock can be driven higher by the 12% to 13% expected earnings growth plus some multiple expansion from the low valuation.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The article is for informational purposes only (not a solicitation or recommendation to buy or sell stocks). David is not a registered investment adviser. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.

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