Trade Idea – $PYPL: Bill Me Later

by Dan November 13, 2015 3:31 pm • Commentary

Earlier in the MorningWord (You’ve Got Money), I offered a few thoughts on the current landscape on the electronics payment landscape after news on Wednesday that Apple (AAPL) is speaking with banks to create a peer to peer money transfer product like PayPal (PYPL) fast growing Venmo.  Prior to this week’s reports of AAPL looking beyond merely processing epayments with their PAY service, it has been my view that PYPL could draw interest from the likes of Facebook (FB), Google (GOOGL) and Micosoft (MSFT) in an attempt to better compete with AAPL and Amazon (AMZN) who are both moving aggressively with In-App Buy buttons.

The electronic payments space is heating up, largely the result of the proliferation of smartphones, and advances in near field communication chips making mobile payments accessible.  So its not just online purchases via services like PYPL, but using your smartphone with merchants, paying peers via a text and more to come.  PYPL has first mover in a couple of these areas, which I suspect make them a target.  John Carney of the WSJ yesterday had a great article on the different moving parts and players in the emerging epayments environ: Apple’s Opportunity: The Payment System’s Profits

Following Facebook’s $22 billion acquisition of short messenger mobile app WhatsApp, the company a few months later in June 2014 hired PYPL’s president David Marcus to run their Messenger business. There are many that believe FB’s plan to monetize WhatsApp is not through advertising, but creating peer to peer money transfer capabilities like Venmo, which would likely be right up Marcus’s sleeve.  Could PYPL be a target of FB, sure but it would have to come at a considerable premium to its current $42.5 billion market cap.  I suspect FB is an unlikely bidder.

But Google,  who I also think should buy Twitter, should be very keen to merge their Wallet payments platform with PYPL and face the emerging AAPL, FB and AMZN threat head on. GOOGL has $72 billion in net cash on their balance sheet, and the wagons are circling around them.  Same goes for MSFT.

SO here is the thing about PYPL at current levels.  As I said earlier, the stock is not particularly expensive when comparing on a multiple of sales to MasterCard (MA) and Visa (V).  Paypal is expected to have sales grow 16% in 2016 to $10.7b, and trades at 4x those expected sales, vs MA which is expected to have sales growth of 11% to $10.8 billion and trades 10x sales and lastly V which is expected to have sales grow 10% to $15.2 billion and trades 12x expected sales.

My views are still emerging on who will be the winners and losers, but I suspect we are still in the very early innings and while the above comparisons are not exactly apples to oranges between PYPL and the traditional transaction processors, rapid growth in Venmo for PYPL could make the company that much more attractive.

PYPL has limited trading history since its July spin-out from EBAY, but $30 appears to be an important double bottom low, while the stock has found technical resistance in its short history in the high $30s:

PYPL since July spin from Bloomberg
PYPL since July spin from Bloomberg

While there are likely to continue to be rumor and innuendo about what AAPL may or may not do in the space, there is no mistake, what they do will determine what the others listed above will do.  I don’t want to buy PYPL here, but I would down at $30, and I like the idea of setting up a trade structure that gives me leverage to the upside in the event of some unexpected positive news.

Here is the trade:

*PYPL ($34.65) Buy Jan16 30 / 40 Risk Reversal for a 10 cent credit

-Sell to open 1 Jan16 30 put at .60

-Buy to open 1 Jan16 40 call for .50

Break-Even on Jan16 Expiration:

Profits: 10 cents between 30 and 40, gains as if long stock above 40, up 15%

Losses: below 30 as if long stock, down 14%, worst case put the stock at 30 or below

Mark to Market: the position will have losses as the stock moves closer to the short put strike, and gains as it moves closer to the long call strike.

Rationale:  The stock is in the midpoint of its 4 month range, I am hesitant for an outright long entry here, but like the idea of establishing a range where I could get long on the downside at the all time lows, but also at what would be a breakout. Think of this trade as a leveraged good till cancel buy order below the market.