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Is Trending Stock PayPal Holdings, Inc. (PYPL) a Buy Now?

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Paypal (PYPL - Free Report) has been one of the most searched-for stocks on Zacks.com lately. So, you might want to look at some of the facts that could shape the stock's performance in the near term.

Over the past month, shares of this technology platform and digital payments company have returned -9.5%, compared to the Zacks S&P 500 composite's -10% change. During this period, the Zacks Internet - Software industry, which Paypal falls in, has lost 13.1%. The key question now is: What could be the stock's future direction?

While media releases or rumors about a substantial change in a company's business prospects usually make its stock 'trending' and lead to an immediate price change, there are always some fundamental facts that eventually dominate the buy-and-hold decision-making.

Earnings Estimate Revisions

Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company's earnings projection. This is because we believe the fair value for its stock is determined by the present value of its future stream of earnings.

Our analysis is essentially based on how sell-side analysts covering the stock are revising their earnings estimates to take the latest business trends into account. When earnings estimates for a company go up, the fair value for its stock goes up as well. And when a stock's fair value is higher than its current market price, investors tend to buy the stock, resulting in its price moving upward. Because of this, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.

For the current quarter, Paypal is expected to post earnings of $0.87 per share, indicating a change of -24.4% from the year-ago quarter. The Zacks Consensus Estimate has changed -0.3% over the last 30 days.

For the current fiscal year, the consensus earnings estimate of $3.95 points to a change of -14.1% from the prior year. Over the last 30 days, this estimate has changed -2.1%.

For the next fiscal year, the consensus earnings estimate of $4.77 indicates a change of +20.9% from what Paypal is expected to report a year ago. Over the past month, the estimate has changed +124.2%.

With an impressive externally audited track record, our proprietary stock rating tool -- the Zacks Rank -- is a more conclusive indicator of a stock's near-term price performance, as it effectively harnesses the power of earnings estimate revisions. The size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #5 (Strong Sell) for Paypal.

The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:

12 Month EPS

12-month consensus EPS estimate for PYPL _12MonthEPSChartUrl

Revenue Growth Forecast

While earnings growth is arguably the most superior indicator of a company's financial health, nothing happens as such if a business isn't able to grow its revenues. After all, it's nearly impossible for a company to increase its earnings for an extended period without increasing its revenues. So, it's important to know a company's potential revenue growth.

In the case of Paypal, the consensus sales estimate of $6.82 billion for the current quarter points to a year-over-year change of +9.3%. The $28.26 billion and $32.84 billion estimates for the current and next fiscal years indicate changes of +11.4% and +16.2%, respectively.

Last Reported Results and Surprise History

Paypal reported revenues of $6.48 billion in the last reported quarter, representing a year-over-year change of +7.5%. EPS of $0.88 for the same period compares with $1.22 a year ago.

Compared to the Zacks Consensus Estimate of $6.41 billion, the reported revenues represent a surprise of +1.17%. The EPS surprise was 0%.

Over the last four quarters, Paypal surpassed consensus EPS estimates two times. The company topped consensus revenue estimates two times over this period.

Valuation

No investment decision can be efficient without considering a stock's valuation. Whether a stock's current price rightly reflects the intrinsic value of the underlying business and the company's growth prospects is an essential determinant of its future price performance.

While comparing the current values of a company's valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S) and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company relative to its peers on these parameters gives a good sense of the reasonability of the stock's price.

The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to both traditional and unconventional valuation metrics to grade stocks from A to F (an An is better than a B; a B is better than a C; and so on), is pretty helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.

Paypal is graded D on this front, indicating that it is trading at a premium to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.

Conclusion

The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about Paypal. However, its Zacks Rank #5 does suggest that it may underperform the broader market in the near term.


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