The technology behind credit card transactions is miles away from the sector’s origins. Long gone are the days of the swipe of carbon paper machines. They even invented a new term for the sector, fintech, boasting new companies as cool as the name.
Paypal (NASDAQ:PYPL) stock is one of those new kids on the block teaching three old dogs new tricks. But Visa (NYSE:V), MasterCard (NYSE:MA) and American Express (NYSE:AXP) are holding their own. They too, transformed into new companies for the future.
The question then becomes about timing. It isn’t always reasonable to chase the perfect entry spot, especially with momentum stocks like these. They move too fast to leave clear entry and exit points.
Investing in PYPL stock is an easy decision in my book over the long term. But it’s also good to avoid chasing it at the wrong times. Being perfect is unrealistic, but we can do our best to avoid potential traps. In the very long term, an askew entry won’t matter much. But call me crazy, I don’t like to sit on losing trades when I can avoid it.
The current economic conditions are unique. Indices are at all time highs but there are areas with extreme weakness. Great stocks like Paypal have fallen through the cracks of late. At one point yesterday, PYPL was down 20% from its 2021 highs. Square (NYSE:SQ) was in a similar predicament going into its earnings report.
Fintech Is An Investment For Generations
These are great fintech businesses with a rosy outlook. Even before the pandemic, but especially since, trends in their favor have accelerated, with a long runway to boot. They also have their hands in all the right areas, including Crypto. Under the current conditions, weakness in PayPal stock is opportunity to get long. The potential of subsidiary Venmo’s 50 million users alone is good enough reason to jump in.
But even though I like the prognosis, we shouldn’t blindly jump in. My concern comes from the prevailing irrational exuberance in the markets. Bulls are only selling in order to buy something else.
Plus, there is a new breed of retail investors to contend with, and they are ferocious. They have extreme conviction without the usual backup for it. I’ve had the opportunity to go toe-to-toe with them in social media. They are very confident and unwilling to bend.
Only time will tell if their positions prove durable through bearish cycles. For now, it works because the macroeconomic conditions favor bulls. We have extreme tailwinds to compensate for skill potholes.
The U.S. government is infusing the economy with an astronomical amount of money; we are already above $5 trillion. That’s larger than any nation’s GDP on the planet except for two. Shorting this much artificial catalyst would be hazardous for your bank account.
Buying PYPL Stock on Dips Makes Sense
Therefore buying the dips makes sense and PayPal stock qualifies. Late last year it broke out from $230, which we charted as a level of contention. That level is now close to provide support.
Since this isn’t an absolute line in the sand, investors should allow for wiggle room. They can do that by using options to sell puts instead of buying shares outright. Otherwise it’s best to take partial positions and add later if the selling persists. There is further technical support around $190 per share. Those lucky enough to get in there should be very happy over the next few years.
There is fundamental justification for the enthusiasm. The income statement shows that revenues and net income grew by 60% and 130% in four years. These are impressive figures but what is more attractive is that the stock is still cheap. Given strong growth, the 70 P/E and 14 price-to-sales ratios are reasonable. This is still about 40% cheaper than Tesla (NASDAQ:TSLA) by an absolute comparison.
PayPal has a good story to tell and technical support besides. To sweeten the pot even more, fundamentals suggest it is still cheap. Those are reasons enough for me to argue for owning shares on weakness, not panicking out of them.
SQ reported earnings last night and the stock had an initial negative shock but quickly recovered. Perhaps most of the froth is already out and the bulls could be ready to resume buying. We are still going into a seasonally tough season for stocks so caution is still a good idea.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.