I see a payday coming with PayPal (PYPL) -- if you use the right strategy.
PayPal is now trading at 20% of its highs from late 2021. The company has had a series of disappointing quarterly reports over the years. For those who still shop only in-store, pay in cash and read the print newspaper, PayPal runs a technology platform that provides digital and mobile payments on behalf of consumers and merchants. Gross and operating margins have stagnated in recent years and revenue growth will be flat this year. Paul Singer's fund also recently dumped its stake in the stock, disappointing investors. The company recently named a new CEO to help turn things around.
Despite these challenges, earnings per share should grow approximately 10% this year to just north of $4.50 a share. Analyst projections are that earnings growth should rise a tad to around $5.20 a share as sales grow in the high single digits in fiscal 2024. The company's balance sheet is in good steed with net cash of some $4 billion. The company plans to repurchase at least $1 billion in shares during the rest of 2023 and $4 billion to $5 billion in fiscal 2024. The company's current market cap is around $65 billion.
The company reported second quarter earnings early in August of $1.16 a share and revenues beat estimates by some $30 million. That and the new CEO appointment seems have encouraged the analyst firm community. Six analyst firms including Barclays and Goldman Sachs have reiterated "Buy" ratings on PYPL this week. Mizuho Securities also assigned a new "Buy" rating on the shares. Price targets proffered range from $88 to $100 a share. The stock currently trades for just less than sixty bucks a share.
Earlier this week, Real Money Pro's Paul Price wrote how PayPal could be played with naked puts. I think it is a solid strategy given the current valuations in the name after a large decline in the stock. But I am going to come at it with a slightly different option strategy and tee it up as a good covered call trading idea with significant downside risk mitigation, given the shares have been a falling knife for nearly two years now.
Option Strategy:
Here is how I opened a new position in PYPL using a covered call strategy. Selecting the February $55 call strikes, some 7% below the current trading levels of the stock, fashion a covered call order with a net debit in the $49.40 to $49.50 a share range (net stock price - option premium). This strategy provides downside protection of approximately 17%. This strategy also has 11% potential upside if the stock drifts down to the $55 level during the six-month option duration.
