PayPal (PYPL) Earnings Preview and Stock Alt

by Dan April 26, 2017 1:16 pm • Trade Ideas

PayPal (PYPL) will report their Q1 earnings tonight. The options market is implying about a $1.80 move in either direction (or ~4%) between now and Friday’s close (most of which is for tomorrow’s post-earnings reaction). Since the company split from eBay in mid-2015 shares of PYPL has moved on average about 4.5% following earnings.

Shares of PYPL are up nearly 13% on the year, having just made a new all-time high this morning. The technical set up is fairly simple, above current levels there is no overhead resistance, and obvious near-term technical support is down near $42, a level the stock was trading at just two weeks ago prior to its recent run, which also happens to be the intersection of the uptrend from its 2015 lows:

Bloomberg

Shares of PYPL traded at nearly 26x expected 2017 eps that consensus sees growing 15% year over year, on 16% expected sales growth to nearly $13 billion. This might seem a tad rich, but consensus expects 2018 sales and earnings growth to accelerates to 17%. There are few $50 billion market cap companies with PYPL’s revenue base and profitability displaying that sort of growth. Visa (V) is expected to grow earnings and sales in the current fiscal year mid to high teens percentages and trades over 27x, while Mastercard (MA) is expected to grow earnings low teens percent this year and sales 9% to about $12 billion, below PYPL and trades 27x. There is valuation support for PYPL in between these two long-established payment processors.

With the stock’s recent run into earnings though, I suspect this is a not a great entry for a long-biased trade, and existing longs might consider stock alternatives to better define near-term risk at an all time high into a potentially volatile event. For instance.

Stock Alternative in lieu of 100 shares of PYPL (44.40)

Buy the May 44/47.5/50  (unbalanced) call fly for 1.00
  • Buy 1 May 44 call for 1.35
  • Sell 2 May 47.50 calls at .20 (.40 total)
  • Buy 1 May 50 call for .05

 

Breakeven on May expiration: Losses of up to 1.00 below 45, gains of up to 2.50 between 45 and 47.50. Profits trail off to zero at $50 but not losses above.

Rationale – This defines risk to just 1.00 (.80 less than the implied move of 1.80) and targets a move higher to 47.50 for May expiration. It is an unbalanced fly which means there’s no risk of loss if the stock gaps significantly above the target area and it establishes a profitable range of 45 to 50 with the max gain at 47.50, losses below 45 but no losses above 50. It breakeven just .60 above where the stock is at entry.