Name That Trade – $PYPL: Send Money

by CC August 20, 2015 1:03 pm • Commentary

Since EBAY’s tax free spin-out of their faster growing Paypal (PYPL) unit, the new stock has traded within a range of $34 on the downside, and just above $42 on the upside, with the average price of the period 4% above where the stock is trading now:


Obviously there is little to gleen from a little more than a month of trading, but one thing is certain that now as a standalone, investors will have a much clearer picture of the company’s opportunities and risks.  Back on July 20th, following the company’s first report on its own, the WSJ laid out a fairly objective view of the current payments landscape and how PayPal fits in: PayPal Enters a Brave New World of Money Disruption.  Competition from the likes of Apple and Google will pose the biggest risks going forward, and the formidable competition from long time rivals Mastercard (MA) and Visa (V) remains unyielding.

In PYPL’s Q2, (per the WSJ) the company “processed 1.1 billion transactions in the second quarter worth $66 billion; 22% of that, or $14.5 billion, came from eBay marketplaces. New active accounts rose 11% to 169 million. Revenue rose to $2.3 billion”.    In 2015, PYPL is expected to have $9.25 billion in sales, just a tad below the expected $9.76 billion for MA, and well below the $14 billion expected for V.  Yet PYPL trades at only 5x those expected sales with a market cap just below $45 billion, while MA trades 11x expected sales and V near 13x expected 2015 sales.   PYPL is the tech company with fast growing peer to peer payments App Venmo, and recently acquiring online money transfer service XOOM. What gives?  

Wall Street analysts launched coverage with generally positive outlook, 23 Buy ratings, 9 Holds and 2 Sells with an average 12 month price target of about $44.  The stock seems kind of cheap to me, obviously on a price to sales basis vs peers, but also relative to tech peers as it’s hard to find too many $50 billion market cap companies with mid-teens sales growth and high teens earnings growth trading at 30x earnings.

Options: Implied vol is in the mid 30’s from September and out. It being such a new listing it’s difficult to guage where it goes from here. EBAY IV is about 10 points lower despite being both a smaller market cap than PYPL, and sporting a stock price 10 dollars lower (vol is usually higher for lower dollar, smaller market cap stocks) but this could be a reflection of both it being a new listing and it being in a more competitive market with tape bombs more possible. But one would think vol would come in slightly once the newly listed stock establishes more of a trading pattern.

The Jan 2016 35 straddle is priced at 6.30 right now, implying a move out of the range by year end. Is that dollar cheap or is it expensive and implied vol too high?  ¯\_(ツ)_/¯

Our sense is it’s probably too high for such a mature company but that doesn’t mean it wouldn’t climb into the next earnings. If the stock does continue to hold its fairly tight range range trades in the next few months could make sense.

Our View:  The stock is interesting and if we were to see it back towards the low of the 6 week range at $34 we would likely look to structure a bullish trade that targets a move back to the midpoint of the range ($38) over the next couple months, while also mitigating a decline in options prices. You guessed it, an in the money call butterfly, stay tuned.