PayPal Holdings Inc. was spun off from eBay in 2015 and, judging from its share price three years later, it has been a tremendous investment. PayPal stock fell to $30 a share in August 2015. By September 2018, it was trading above the $93 mark. Following last month’s dip to $74.66, the stock is on the rise again, currently in the vicinity of $90.
PayPal stock’s 200% total return in three years translates into 44.2% compounded annually. This is something even the best money managers out there can only dream of. What bothers us that people tend to extrapolate the recent past into the distant future. This creates the belief that what has worked before will continue to work. Unfortunately, all the stock market crashes in history suggest otherwise.
So is PayPal stock still a good investment? Is it time to join the bulls or get defensive? Let’s see if the Elliott Wave Principle can help us answer these questions.
The daily chart reveals the structure of PYPL stock’s bull market. The rally from $30 to almost $94 can be seen as the first three waves, labeled I-II-III, of a five-wave impulse. The sub-waves of wave III and the sub-waves of wave (3) of III are also clearly visible.
This means the recent dip to under $75 in October stands for wave IV down and wave V up is now in progress. Since wave V is supposed to exceed the top of wave III, it follows that $100 a share is within the bulls’ reach in the short-term.
Danger Lurking Ahead for PayPal stock investors
On the other hand, the Elliott Wave theory states that we can expect a three-wave correction in the opposite direction as soon as wave V is over. The bearish RSI divergence between waves (3) and (5) of III also indicate PayPal stock is losing momentum.
Besides, PayPal’s 2018 guidance is for EPS of $1.69, which gives the stock a forward price to earnings ratio of almost 53. This is a very high ratio, which means a lot of optimism is already priced in PayPal’s valuation. And where optimism is strong, disappointment lurks.
In conclusion, PayPal stock seems determined to reach $100 a share. Instead of joining the bulls, though, investors should proceed with caution. We believe a 30% decline to the support near $70 is just around the corner for the online payments provider.
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