Update – Paypal (PYPL) Refund

by riskreversal October 21, 2016 1:50 pm • Trade Updates

Hop into the Way Back Machine all the way to May 17th. On that day we wrote a post looking at Paypal (PYPL) into their first analyst day as an independent stock, following its 2015 split from Ebay. Here’s what we had to say at the the time:

The company has a great balance sheet, $4.76 billion in cash, and no debt and is in the midst of a $2 billion share buyback announced in Q4 of last year.  The company has guided eps and sales to grow at about 16% this year, and the stock trades at 26x that expected eps growth, and 22x that for 2017, expected to be in high teens.

For comparison sake Mastercard (MA), which sports a market cap of $105 billion, more than double that of PYPL’s $47.5 billion, is expected to have 2016 sales of $10.5 billion, which after only growing 2% last year are expected to accelerate to 8% growth this year.  MA trades 27x expected 2016 eps growth of only 3% and 23x what is expected to be a meaningful acceleration to 17% growth.  Seems fairly hopeful.

If we were playing would you rather, I’d much rather PYPL, which is expected to have $10.7 billion in sales in 2017, and as Peck says, “benefit from strong network effects as it transitions from a payment “button” to providing end-to-end payment solutions”.  Which ultimately could lead a MA or Visa (V) to look to partner with PYPL (V & PYPL are currently discussing “legacy” data sharing issues, but could lead to partnerships that PYPL management suggests both parties could be winners).

To express a longer term view, we faded the analyst day in order to buy a calendar that caught the earnings reported last night. Here was the original trade idea:

*Trade: PYPL ($39.25) Buy June / Oct 42 Call Calendar for $1.60
  • Sell to Open 1 June 42 call at 45 cents
  • Buy to Open 1 Oct 42 call for $2.05

Last night:

Paypal posted third-quarter revenues of $2.67 billion, beating estimates of $2.65 billion.  The payments company said it expects fourth-quarter revenue between $2.92 billion and $2.99 billion. It also expects non-GAAP EPS of between 40 cents and 42 cents.

The company provided guidance for fiscal-year 2017 in its release, expecting currency-neutral revenue growth of between 16 percent and 17 percent.

It reported a third-quarter increase of 11 percent in active customer accounts, and a 24 percent increase in the number of transactions processed. Total payment volume increased by 25 percent to $87 billion in the third quarter as well.

The stock is higher today by about 9%, trading at $43.85. At that price, our original trade (which is now simply the Oct 42 calls is worth 1.85, vs our original cost of 1.60. That’s basically a bail out on this position as the stock got as low as 34 this Summer so we’ll close today for a small profit and look to re-enter on a new long term position on a pullback towards $40.